Class 
Book 




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Copyright N°_ 



COPYRIGHT DEPOSIT. 



THE 
INVESTORS PRIMER 



BY 

JOHN MOODY 

AUTHOR OP 

"THE TRUTH ABOUT THE TRUSTS," "THE ART OP WALL 

STREET INVESTING," " MOODY'S ANALYSES OP 

RAILROAD INVESTMENTS " 



THIRD EDITION, REVISED 

VOLUME IV OF "THE INVESTOR'S LIBRARY" 
Other Volumes of this Library are: 

PITFALLS OP SPECULATION. STOCK PRICES. CYCLES OP SPECULATION 

MINING INVESTMENTS AND HOW TO JUDGE THEM 

ART OP WALL STREET INVESTING 



NEW YORK 

MOODY'S MAGAZINE BOOK DEPARTMENT 

1912 



Copyright, 1907, by 
JOHN MOODY 

Copyright, 1912, by 
A. W. FERRIN 
All rights reserved 



gCLA305848 



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PREFACE. 

There has long been a demand for a concise 
handbook which would give, in simple, under- 
standable language, definitions of all the im- 
portant terms and phrases employed in the in- 
vestment and banking business. This little 
book represents an effort to in some measure 
supply this demand. 

The book is really in two parts, the first part 
covering the general definitions of finance; the 
second giving more specific information re- 
garding investment securities and the manner 
in which they are distributed to the public. 



Introduction 

T^HE investment of money is a business, 
just as the manufacture of shoes and the 
selling of food are businesses. But modern 
investing is even more than a business; it is 
influenced by and covers all businesses, all en- 
terprises, all industry. In the early days of 
the Republic, the situation was, of course, 
somewhat different. At that time there was 
but little wealth and therefore little capital. 
Population was sparse, privation was great, 
men were absorbed in holding body and soul 
together, in feeding and clothing themselves, 
rather than in seeking for luxuries. There 
was no leisure class in those days and, as a 
consequence, no investing class. For then, an 
investing class could only be drawn from a 
leisure class. Nowadays investors are made 
up from all classes, and a vast amount of 
money which is invested in stocks and bonds 
and other enterprises is the money of the poor, 
of the moderately-well-to-do and of the indus- 
trious, as well as of the merely rich and the 
non-industrious or idle. One hundred years 
5 



6 THE INVESTOR'S PRIMER 

ago only a very few could spare anything be- 
yond their daily needs for investment in out- 
side things. If they accumulated any wealth 
at all above their cost of living, it was used to 
buy or build a home, raise and educate a family 
or develop a small undertaking of their own. 
And, indeed, even though they acquired or 
possessed surplus wealth, practically the only 
forms of investment accessible were govern- 
ment securities or loans upon realty. There 
were no railroads, no trolley companies, no 
manufacturing enterprises of large size, or 
other fields for the productive employment of 
surplus capital. Even savings banks were 
practically unknown, and mining or explora- 
tion enterprises were largely of that uncertain, 
speculative nature that only the boldest and 
least timorous would look favorably upon. 

But to-day the field of investment covers 
enterprises of every conceivable nature. 
Manufacturing corporations covering every 
thinkable need or luxury of the human being, 
distributing concerns selling every kind and 
class of necessity and luxury in the line of 
food, clothing, or what not, are all embraced 
in the investment field. Transportation 
methods of every kind from the stage-coach 
to the powerful locomotive, from the coal cart 
to the automobile, are operated with the capi- 



INTRODUCTION 7 

tal of investors. Our department stores, our 
restaurants, our candy manufacturers, our 
theaters, our magazines and newspapers, the 
advertisements in the street cars, many of the 
metropolitan barber shops, the boot-black 
stands, and the news stands and book stores are 
operated by corporations, the capital in which 
is largely derived from investors. Not a large 
building is now put up in New York City but 
that an enormous corporation puts in the foun- 
dation; another corporation erects the super- 
structure and still others put on the finishing 
touches, all being concerns whose shares or 
bonds are owned by investors in all parts of 
the country. The hats we wear, the umbrellas 
we carry, the suit of clothes, the shoes, the 
socks, the shave we had this morning, or the 
ham we ate this noon — all these were shaped 
and produced to a large extent by the money of 
investors. When we realize that one corpo- 
ration in this country boasts of over eighty 
thousand stockholders, and that many others 
are known to have over thirty thousand, we be- 
gin to get a slight idea of the magnitude of 
the investment field. 

But this is not all. Not only is all modern 
business essentially the investors' field, but 
all the obligations of municipalities, of coun- 
ties, cities and States are held by investors. 



8 THE INVESTOR'S PRIMER 

The governments themselves build up their 
navies and armies, carry on wars and develop 
public works with the money of investors. A 
case in point is our own Panama Canal. And 
not only do the investors of one country sup- 
ply funds for their own activities, but they also 
supply much for the activities of other nations. 
Thus, when the American is investing money 
in a Mexican gold mine or in Japanese Govern- 
ment bonds, he is supplying investment funds 
to undertakings in those countries, and when 
the Englishman or Frenchman buys our rail- 
road or industrial bonds or stocks, he is supply- 
ing investment capital for undertakings in our 
own country. The investors' field in this 
country would seem, therefore, to be limited 
only by the wealth of the country itself. 

But what about the methods for investing 
money? Where does the money come from? 
Does it all come into Wall Street and the other 
financial centers, or does it flow directly from 
the pockets of the investors into the under- 
taking or enterprise itself? 

Speaking broadly, there are two methods 
by which money is invested in any given enter- 
prise. These are, direct and indirect. The 
person who places money directly, or through 
a broker or banker, in a specific enterprise or 
undertaking is a direct investor. He person- 



INTRODUCTION 9 

ally becomes the stock or bond-holder in a cor- 
poration of his own choosing. But the man 
who deposits his money in a savings bank, in- 
surance, or trust company or State or National 
bank, is an indirect investor. His money goes 
into an investment of some sort where it earns 
the interest which he receives and possibly a 
little more. In the former case, he sees his 
money at work; it stays presumably in the 
place where he puts it. In the latter case, he 
delegates the matter of actual investment to 
another — to the bank — which acts in the ca- 
pacity of a trustee, and invests his money for 
him. And in both cases, the money may 
easily be invested in the same enterprise. Thus, 
in the latter case, he may place his money in a 
savings bank, and the bank may then invest 
it in New York Central Railroad 3%% bonds. 
In the former case he may himself, through an 
investment banker, purchase New York Central 
Railroad 3^2% bonds. His money is in the 
same enterprise in both instances, the chief 
difference being that, in one case, he knows it; 
in the other, he does not. 

This brief sketch of the investment field 
which obtains in this country to-day will give 
a rough idea of the breadth of the subject 
under discussion. And, in taking this broad 
view, we must bear the fact in mind that this 



10 THE INVESTOR'S PRIMER 

is not a stationary condition, for the American 
investment field is broadening and intensify- 
ing every day. It is not only growing in size 
and volume, but also in density. We, even 
more, I think, than most other modern nations, 
are going through a quiet, steady, but most re- 
markable evolution in the methods of wealth 
production and distribution. Fifteen years ago 
we were called " a nation of investors," but 
this appellation is far more appropriate to- 
day than it was then. The changes during the 
past ten years in this respect are in no way 
better illustrated than in the remarkable ex- 
pansion of Wall Street. The mere growth of 
stock exchange business, while great in itself, 
is not a complete guide in this matter. We 
must necessarily take into consideration the 
vast expansion of investment business outside 
of the stock exchange floor. 

While there are no accurate figures for 
demonstration, the acknowledged fact that a 
hundred first-class investment houses exist in 
the Street to-day where ten existed in 1896 is 
evidence enough in itself that the expansion 
has been great. In 1896 or 1897, if an invest- 
ment bond house bought or sold $500,000 or 
$1,000,000 of bonds in one block or at one time, 
the fact was heralded far and wide as a notable 
event; nowadays such transactions and much 



INTRODUCTION 11 

larger ones are constantly going through and 
create no comment whatever. In those days, 
if a bond or investment firm made half a 
million dollars in any one year, it was regarded 
as a most remarkable showing, but at the 
present time, dozens of houses can be pointed 
out in the Street which are making this or a 
better showing every year. To-day, single 
firms buy entire issues of bonds or stocks 
sometimes running into the tens of millions in 
amount; ten years ago this was unheard of, 
and usually a "million dollar loan" was re- 
garded as of such magnitude that it required 
a syndicate of half a dozen or more concerns 
to underwrite it. In the field of stock specula- 
tion and trading, in those days, a business of 
15,000 shares in one day was regarded as very 
large. To-day many firms do 50,000 to 100,000 
shares per day right along in normal times. 
Then, a firm carrying on margin $5,000,000 
worth of stock was a large firm; to-day many 
are constantly carrying from $30,000,000 to 
$40,000,000 worth. In the actual banking field 
the expansion has been equally great. Now 
many banks and trust companies in the city of 
New York can boast of deposits of $40,000,000 
and over; in those days none could. And yet 
there are now several times the banking facili- 
ties in New York that there were in 1896. 



12 THE INVESTOR'S PRIMER 

While Wall Street is the main center of in- 
vestment, it alone has not enjoyed all the ex- 
panding. Other cities, all over the land, can 
now boast of financial and investment centers 
of no mean extent. In most cases they have 
close alliances with the main center in New 
York, but they are all sharing in the general 
expansion of this particular phase of modern 
commercial advancement. 

The fact should be consistently borne in 
mind that this great investment field is con- 
stantly being accelerated from several sources. 
Not only does it benefit by the steady growth 
of population and general development of the 
country, but it expands steadily because of 
the fact that it is becoming increasingly neces- 
sary to do things more and more on a large 
scale, and this tendency automatically involves 
the elimination of the smaller producer and 
competitor, and forces a steadily expanding 
element into the field of investment. Even 
the busy workers of to-day, as well as the 
leisure classes and those who pursue the pro- 
fessions, find it profitable to place their surplus 
funds more and more into enterprises outside 
of their chosen environment. It is this tend- 
ency of modern civilization which has much to 
do with making the investor class of greater 
importance in all parts of the country. 



PART I. 



The Investor's Primer 

ACCOUNT AND RISK. The forms usu- 
ally provided by brokers for the use of their 
customers when giving orders for purchases 
or sales of securities, bears the inscription, 
"Buy or sell for my account and risk." The 
meaning of this is that when an order as given 
is executed by the broker, it is done for the 
account and risk of the customer exclusively, 
and that the broker is simply acting as the 
agent in the matter and is therefore in no sense 
liable himself, but holds the customer wholly 
responsible for the transaction. 

ACCRUED DIVIDEND. The amount or 
proportion of a regular dividend not yet pay- 
able that has accumulated at a given time after 
the date of payment of the preceding regular 
dividend. For instance, if a dividend on a 
stock at the rate of 6% per annum is payable 
semi-annually January and July ist, the 
amount of acrrued dividend on a given date, 
such as April ist, will be 1%%. Cumulative 



15 



16 THE INVESTOR'S PRIMER 

dividends which have not been paid when due, 
but which have accumulated, are sometimes 
called accrued dividends, but the correct term 
for such is "accumulated dividends." A cumu- 
lative dividend is an entirely different matter. 



ACCRUED INTEREST. This is the 
amount of interest on a bond or debenture 
stock not yet payable, but which has accrued 
over a given period of time subsequent to the 
last regular payment. For instance, if the in- 
terest on a 4% bond is payable semi-annually 
January and July i, the amount of accrued 
interest on the bond on April ist would be ex- 
actly i%, which on a $1,000 bond would 
amount to $io. Many bonds are quoted 
"with accrued interest" and sold on this basis. 
This is particularly true of unlisted issues, 
municipal bonds, etc. Most of the issues 
quoted on the stock exchanges are sold "flat" ; 
that is, the accrued interest is not separately 
figured but is included in the price. To bring 
the distinction out concretely between a price 
quoted with accrued interest, and a price 
quoted "flat" the following illustration is sub- 
mitted: If a 4% bond is selling at 90 and ac- 
crued interest on January ist, the total cost of 
the bond will be exactly $900 ; but if on April 



THE INVESTOR'S PRIMER 17 

ist it is still quoted at go and accrued interest, 
the total cost of the bond will be not $900 but 
$910, the $10 representing the accrued inter- 
est over the preceding three months. If, how- 
ever, the bond is quoted "flat" the price on 
April 1 st, other things being equal, would be 
given as 91. It will be seen, therefore, that the 
matter of accrued interest directly affects the 
"flat" price but does not affect the "and in- 
terest" price. As very large transactions are 
made daily in bonds on an accrued interest 
basis, it is necessary to do a great deal of fig- 
uring from day to day on the amounts of ac- 
crued interest when making purchases and 
sales. To facilitate this, most bankers and 
brokers make use of pocket bond interest 
tables, which contain the figures showing the 
amounts of accrued interest on $1,000 bonds 
for every day from one day to six months, at 
the various rates of interest from 2% up to 
8%. 

ACCUMULATED DIVIDENDS. This 
term is properly used to describe cumulative 
dividends which for one reason or another have 
not been paid as they fell due. For instance, 
in many corporations, particularly industrials, 
there are issues of preferred stocks on which 
the dividend charge is so heavy that the corpo- 



18 THE INVESTOR'S PRIMER 

ration is not able to earn and meet the pay- 
ments. The amounts of dividends, therefore, 
have accumulated, and, theoretically at least, 
must be paid off some day. Usually when divi- 
dends of this kind or portions of dividends have 
accumulated over a series of years and it has 
been pretty well demonstrated that there is 
little prospect of the corporation being able 
ever to make good the back payments, some 
plan of compromise is then submitted to the 
stockholders whereby the accumulations are 
paid, possibly in securities of some kind, and 
then the rate of dividends is scaled down for 
the future. It is not always difficult for the 
corporation to make a readjustment of this 
kind, as the cumulative clause in a stock is 
really not of a great deal of value if the corpo- 
ration cannot in some way earn sufficient 
money to pay the full dividend. In other 
words, the stockholder has no means of fore- 
closing on the property or bringing legal ac- 
tion if the past dividends are not paid. 

ADJUSTMENT BOND. This term is used 
to describe a bond which has been issued for 
the purpose of in some way adjusting the 
finances of a company, usually at the time of 
a reorganization. For example, when the 
Atchison, Topeka & Santa Fe system was re- 



THE INVESTOR'S PRIMER 19 

organized in 1897, some compromise had to be 
made with the old preferred stockholders and 
the. holders of the general mortgage bonds. It 
was necessary for the road to radically reduce 
its fixed charges, but at the same time the re- 
organization committee could not avoid giv- 
ing the holders of a large proportion of the 
old securities something more tangible than a 
mere preferred stock. The holders were there- 
fore given a second mortgage bond, which 
would be entitled to receive interest only in 
case the same had been earned, and in no 
case would the holders of the bond be able to 
foreclose before maturity in the event of the 
interest not being paid. The interest on this 
particular issue was to become accumulative 
after 5 years, but as far as any positive guar- 
antee of interest being currently paid was con- 
cerned, the issue was simply in the same class 
as the ordinary accumulative preferred stock. 
It will thus be seen that this issue of bonds 
was in the nature of a compromise for the 
benefit of the holders of old securities, and it 
was therefore given the title of "adjustment 
bond." Several other large issues of adjust- 
ment bonds have since been created by other 
companies, but the Atchison "adjustments" 
are the most conspicuous example of this kind 
of security. 



20 THE INVESTOR'S PRIMER 

ALLOTMENT. A term used in connec- 
tion with the amounts assigned to members or 
subscribers in underwriting syndicates. For 
example, it is generally understood when an 
underwriting syndicate is being formed and 
different concerns are subscribing for portions 
of the underwriting, that the managers of the 
syndicate have it in their power to allot to a 
given subscriber less than the amount applied 
for, provided the total subscription or under- 
writing exceeds the total amount offered for 
subscription. There have been many instances 
where an over-subscription of a stock or bond 
issue has been so great that the subscriber is 
finally allotted only a small proportion, some- 
times only 10% of the amount for which he 
has subscribed. This fact of a tendency for 
over subscription has often, in the case of 
popular securities, had the result of inducing 
underwriters to sometimes subscribe for even 
greater amounts than they expected to get. In 
this way, they have been able to secure the 
amounts which they actually desired. 

ARBITRAGE. The meaning of this ex- 
pression is the buying and selling of the same 
thing in two different markets, as, for instance, 
New York and London, the purpose being to 
make a profit from the difference in the quo- 



THE INVESTOR'S PRIMER 21 

tations between the two markets. The term is 
used chiefly in reference to dealings in stocks 
and bonds, but is also used in dealings in ex- 
change and in other commodities. 

Arbitrage in stocks is based on the tempo- 
rary differences in prices between the different 
markets for the same stock. For instance, 
when a stock is selling at a higher price in one 
market than in another, it is sold in the market 
where the higher price prevails and is bought 
in the market where the lower price prevails. 
The operator speculates on a return to the 
same price in both markets. When the 
equality in price has been restored he closes 
his transaction by buying where he sold and 
selling where he bought. The difference in 
price that existed, of course, represents his 
profit, unless the transaction has not been a 
successful one, in which case a loss may be 
reported. 

To illustrate the method of arbitrage trad- 
ing we will assume that a stock is selling in 
one market at ioo and in another at 98. It is 
then sold in the first market at 100 and bought 
on contract in the second market at 98. If 
the stock advances to 100 in the second 
market while it remains stationary in the first 
market a sale is then made in the second 
market and thus 2% is made on the transac- 



22 THE INVESTOR'S PRIMER 

tion there. The same amount of stock is then 
bought back in the first market at ioo, and 
hence neither profit nor loss barring commis- 
sions, results in the transaction in the first 
market, the profit in the second market repre- 
senting the entire net profit of the double 
transaction. Should the stock decline to 99 in 
the first market and advance to 99 in the sec- 
ond market the transaction can be closed up 
with a profit of 1% in each market or 2% in 
the two markets. 

Because of the system of calculating values 
for American stocks on the London Stock Ex- 
change, prices on the London Exchange are 
2^8% higher than the prices for the same 
stocks on the New York Stock Exchange when 
they are actually the equivalent of the prices 
on the New York Exchange. Hence, in arbi- 
trage dealings, allowance has to be made for 
this difference in prices between London and 
New York, which is merely apparent and not 
actual. The figure of 2^8% mentioned above 
is arrived at in the following manner : In deal- 
ings in American stocks on the London Stock 
Exchange four shillings is counted as one dol- 
lar. Four shillings being equal to 97 1-3 cents, 
the price of an American stock must be 2 2-3% 
(quotably 2$/£%) higher in London than in 
New York if the London price is to be equiva- 



THE INVESTOR'S PRIMER 23 

lent to (or at a parity with) the New York 
price. Not 25/ s % of the par value is to be 
added arbitrarily to the New York price, but 
2^8% of the New York price, whatever it may 
be, is to be added to the New York price to 
make an equivalent London price. Thus, for 
a stock selling at 50 in New York the equiva- 
lent price in London would be quotably 51%%. 
For a stock selling at 100 in New York the 
equivalent price in London would be 102^%. 
Conversely, for a stock selling at 100 in Lon- 
don the equivalent price in New York would 
be 97^6%, and for a stock selling at 50 in Lon- 
don the equivalent price in New York would 
be 4854%. 

The difference in equivalent prices between 
New York and London permits two kinds of 
operations in stocks that are dealt in in both 
markets. One operation is called a "spread" 
and the other is called a "back spread." See 
also definition of "spread" as used locally 
under its own heading. 

In the "spread" as employed in arbitrage 
dealings there must be more than a normal 
difference in prices between London and New 
York. The stock is sold in London where the 
higher price prevails, and bought in New York 
where a lower price prevails. Then, when the 
equality in price is restored the transaction is 



24 THE INVESTOR'S PRIMER 

closed by buying in London and selling in 
New York. The difference in excess of the 
normal difference represents the profit in the 
transaction. 

In the "back spread" there must be less than 
the normal difference in prices between New 
York and London. The stock is therefore 
bought in London where the nominal higher 
price prevails, and is sold in New York where 
the nominal lower price prevails. The trans- 
action is finally closed when the equality in 
price has been restored by selling in London 
and buying in New York. The difference in 
price that existed less than the normal differ- 
ence, represents the profit in the transaction. 

A large arbitrage business in active stocks is 
carried on between London and New York by 
cable daily. By the clock London is five hours 
ahead of New York. At 10 a. m. in New York, 
when the New York Stock Exchange opens, 
it is 3 p. m. in London. The London Exchange 
opens at ii a. m. and closes at 4 p. m., except 
on the last day of accounting, when it closes 
at 4.30 p. m. After the closing of the London 
Exchange, American stocks are still traded in 
in the Street. A good part of this street market 
represents arbitrage business with New York. 
Very little business is transacted in New York 
before the opening of the New York Exchange, 



THE INVESTOR'S PRIMER 25 

but orders are sent to London for execution. 
The London curb brokers remain active as 
long as there is business to keep them, con- 
tinuing usually as late as 5.30 or 6 o'clock. 

There is also a business in arbitrages car- 
ried on in grain, cotton, coffee and so forth, 
between different markets in one country or 
between different countries, just the same as in 
stocks between New York and London. 

ASSENTED STOCKS OR BONDS. A 

term which describes securities, deposited 
under an agreement by which the owners as- 
sent to some change in the status of the securi- 
ties. Many reorganizations of properties are 
carried through without foreclosure or other 
legal process, the owners of the securities as- 
senting to some change in the status of their 
stocks or bonds such as an exchange for new 
securities, with possibly less principal or in- 
terest. See also Reorganization. 

ASSESSMENT. An assessment on a se- 
curity is a demand or call from a company or 
its management upon stockholders to pay into 
the treasury a specified sum of money on each 
share of the security which they may hold. 
There are many kinds of assessments, the most 
common in Wall Street being that which re- 



26 THE INVESTOR'S PRIMER 

suits as part of a plan of reorganization by* 
means of which funds are secured for the dis- 
charge of debts and for working capital. 
While most stocks of railroads and other 
large corporations are, in a legal sense, non- 
assessable yet in a reorganization where con- 
ditions have made it necessary for the differ- 
ent security-holders to make concessions and 
sacrifices, assessments are often paid. These 
assessments are, of course, in a sense voluntary, 
and are agreed to by the stockholder and paid 
in order to preserve the property with the hope 
that the reorganization will result in ultimately 
adding value enough to the securities to repay 
the stockholder for the expense of the assess- 
ment. Often the stockholder has no alterna- 
tive except to pay the assessment. If he does 
not pay it, usually an underwriting syndicate 
stands ready to take his stock at a current 
market price (which is often a merely nominal 
one) and pay the assessment itself. This re- 
sults in the former stockholder sacrificing 
practically his entire interest and he is then, 
in a sense, "frozen out." Any future benefit 
from the reorganization is, of course, derived 
by the payer of the assessment, who naturally 
takes the chance of the future success of the 
company and is therefore entitled to its future 
profits. 



THE INVESTOR'S PRIMER 27 

ASSIGNED IN BLANK. The ordinary 
stock certificate has on its back a printed form 
of assignment, whereby the owner of the cer- 
tificate can endorse the same and thus make 
it a good delivery in selling it or passing it on 
to another party. By signing this form in 
blank he makes a legal and formal assignment 
of the stock to any purchaser who, of course, 
can fill in his own name in the blank provided 
for the purpose and then have it transferred 
on the books of the company in the usual way, 
receiving a new certificate in his own name. 
The New York Stock Exchange rules provide 
that any stock certificate assigned in blank by 
the owner must carry a witness to the signa- 
ture, and also a formal guarantee of the sig- 
nature by some stock exchange house in good 
standing. This, of course, is to guard against 
forgeries, errors, etc. 

AVERAGING. This is a speculative term 
describing a method of purchases or sales of 
stock, which speculators often pursue in ad- 
vancing or declining markets, for the purpose 
of improving their position regarding the aver- 
age cost of certain purchases or sales of stock. 
For instance, should a man be dealing in New 
York Central stock on a speculative basis, he 
might begin by purchasing ioo shares at no. 



28 THE INVESTOR'S PRIMER 

Should the price then decline to 105, his trans- 
action up to that date would show him a loss 
of $500. He might then purchase another 100 
shares at 105, and he would thus be carrying 
200 shares at an average cost of 107J4. Should 
the price then advance to above 10754 his 
entire account would show no loss, and he 
could close out the transaction 2y 2 points be- 
low the cost of the first hundred shares and 
yet not lose any money. The practice of aver- 
aging is carried on sometimes on a much 
larger scale. Investors or speculators will 
often put in orders to make purchases on a 
"scale down," buying at every point or two, 
and in a declining market where a given stock 
may drop 25 points, 100 shares may have been 
purchased at every point down. Each pur- 
chase naturally brings the average cost of the 
entire account down to a lower figure. 

The method of averaging is also employed 
in the sales of stocks by investors and specu- 
lators in the same way, both in selling stocks 
for long account and for short account. 

BALANCE OF TRADE. The difference in 
money value between sales and purchases. 
In foreign trade, the difference in money value 
between exports and imports. As commonly 
used the term signifies the balance or differ- 



V 



THE INVESTOR'S PRIMER 29 

ence in favor of a country ; as, for instance, the 
United States as against the rest of the world ; 
or in favor of the rest of the world and against 
that country. When exports exceed imports 
over a given period the balance of trade is said 
to be in favor of the country, and vice versa. 

BANKING. The banking business is al- 
most as old as civilization itself. Money lend- 
ers are mentioned many times in the Bible and 
in all other ancient literature, but banking in 
its modern sense as understood in the civilized 
countries of the world to-day is more of an 
evolution that has resulted as the natural out- 
growth of modern industrial development and 
commercial conditions. Modern banking may 
be said to have begun, therefore, within the 
past three hundred years. Prior to that time 
each man was, in a large degree, the individual 
defender and protector of his own property. 
For instance, three centuries ago it was not 
safe to venture out after nightfall in the streets 
of London unless properly armed or in com- 
pany, and the carrying of valuables of any 
kind was particularly hazardous. Goldsmiths, 
who in those days necessarily had to keep on 
hand large stocks of the precious metals, took 
great precautions for the safe keeping of prop- 
erty of this kind and people gradually acquired 



30 THE INVESTOR'S PRIMER 

the habit of depositing money with them, pay- 
ing something for the privilege in order to re- 
ceive the accompanying protection. In the 
course of time the goldsmiths learned from ex- 
perience that many people who had so de- 
posited money did not require it at once, and 
they thus began to lend out a certain percent- 
age of their surplus on their own authority. 
Furthermore, it was found that if a man had to 
discharge a debt it was often more convenient 
for him to give his creditor an order for the 
money on deposit with the goldsmith than to 
go in person and carry away the gold and de- 
liver it, and thus impose upon the creditor the 
necessity of returning the gold for deposit in 
his own name, and many times in the same 
place. This situation developed the system of 
a transfer of credits by means of checks. This 
method was not only safer but much more con- 
venient than the earlier method of delivering 
the actual coin or bullion. In making loans, 
likewise, the goldsmith now became the banker 
and learned to merely put the loan on his 
books as a credit to the borrower, against 
which the latter could draw his order or check 
precisely as if he had deposited the actual 
money; or the goldsmith issued his own note 
or promise to pay to the borrower, the latter 
passed it on in payment of debts and it became 



THE INVESTOR'S PRIMER 31 

a circulating medium wherever the credit of 
the goldsmith was good. 

Modern banking has evolved to its present 
state from this beginning. The chief function 
of the modern bank is to receive on deposit and 
make legitimate use of the money of its cus- 
tomers. It makes this money and its own paid 
up capital the basis of loans, on which it 
charges interest in accordance with the laws 
under which it is chartered. While these loans 
may take the form of actual money, they are, 
as a rule, merely credits against which the bor- 
rower is privileged to draw. Such loans are 
entered on the books of banks as deposits. In 
actual experience the loans and deposits so 
nearly counterbalance each other that only a 
small percentage of actual money is required 
to transact the larger affairs of business. It is 
only in retail transactions, in the payment of 
employees and in the smaller daily affairs of 
life that actual money is usually used. For all 
other business the transfer of credits by means 
of bank checks and bills of exchange is the 
almost universal rule. In brief, the modern 
bank has become the principal mechanism of 
exchange. To what a remarkable extent bank 
checks have supplemented or taken the place 
of actual money as a medium of exchange in 
modern business, thus making possible the 



32 THE INVESTOR'S PRIMER 

wonderful commercial and industrial activity 
of the present day, can be best realized by 
studying the figures of the operations of the 
various clearing houses of this and other coun- 
tries and the relation which the actual money 
in the vaults of the banks bears to the total 
transactions recorded. 

In addition to its functions as depositories 
for money and the negotiation of credits, the 
modern bank exercises the function of note- 
issuing. In the United States, under the na- 
tional banking law, any national bank may 
issue notes up to the amount of its paid in 
capital stock upon depositing with the United 
States Treasurer, government bonds of the 
United States equal in par value to the amount 
of circulating notes so issued. State banks are 
also authorized to issue notes, but the Federal 
tax of 10% on their circulation acts as an ef- 
fective prohibition on the exercise of this right. 

While the business of banking is embraced 
within the above general scope, yet the term 
banker is very broadly used, particularly in the 
United States. Stock brokers, investment 
dealers, dealers in exchange and commercial 
paper, money lenders, and others are accus- 
tomed to call themselves bankers. Strictly 
speaking these are inaccurate uses of the term, 
although it is now generally acknowledged 



THE INVESTOR'S PRIMER 33 

that in modern usage the term banker must be 
understood to carry a broader meaning than 
was formerly the case. 

BANK OF ENGLAND. The Bank of Eng- 
land, which is the largest and most important 
monetary institution in the world, was incor- 
porated in 1694. It is the custodian of the pub- 
lic monies of Great Britain and the manager of 
the public debt. Its official title is "The Gov- 
ernor and Company of the Bank of England." 
It conducts the banking business of the British 
government ; it receives the revenue of the gov- 
ernment and makes all disbursements for it; 
and it also issues exchequer and treasury bills 
and advances money to the government. It is 
also the central bank of the City of London. 
That is, the other banks keep on their own 
premises only enough of their deposits for the 
requirements of their business, and deposit the 
remainder with the Bank of England. Thus, 
the bank is not only the financial institution of 
the British Government, but also of the other 
London banks and of the whole of the London 
money market. 

BANK OF ENGLAND NOTE. The circu- 
lating note or money issued by the Bank of 
England performs the chief note-issuing func- 



34 THE INVESTORS PRIMER 

tion in the United Kingdom. The bank is per- 
mitted to issue a certain amount of notes upon 
government securities, and it has the privilege 
of issuing, also on government securities, an 
amount equal to two-thirds of the issues of all 
other banks in England and Wales when the 
latter go out of existence or surrender their 
circulation. In addition, the Bank of England 
may issue notes to any further amount it sees 
fit by providing and setting aside an equal 
amount of gold coin or bullion. 

In times of panic the bank is allowed by 
parliament to increase the number of notes that 
it may issue against securities. This is accom- 
plished by the suspension of the "Bank Act," 
which limits the amount of the bank's circula- 
tion of notes backed only by securities. The 
Bank Act was last suspended in 1866. 

The Bank of England's notes are legal tender 
in England and Wales, but are not legal tender 
in payments made by the bank itself. The 
holders of the bank notes are entitled to de- 
mand gold for them on presentation at the 
bank. The notes of other English, Irish and 
Scotch banks are not legal tender, with the ex- 
ception of the notes of the Bank of Ireland, 
which are legal tender in Ireland only. All the 
notes, however, constitute an important circu- 
lating medium. Ultimately the Bank of Eng- 



THE INVESTOR'S PRIMER 35 

land will possess the monopoly of note issue in 
England and Wales. 

The lowest denomination of a Bank of Eng- 
land note is £5 and the largest £1,000. 

BANK OF ENGLAND RATE. This is the 
proper title for the minimum rate of discount 
of the Bank of England. The minimum rate 
is nominally the rate at which the Bank of 
England itself will discount the best three 
months bills. In short, it is the official stand- 
ard of discount. The rate has a direct relation 
to the movement of gold to and from London. 
For instance, the raising of the rate raises the 
value of money and is calculated to attract gold 
from foreign centres where the value of money 
is, for the time being at least, less. The di- 
rectors of the bank often insure the effective- 
ness of the rate by borrowing in the money 
market, thus denuding it of supplies. As the 
raising of the bank's rate raises the value of 
money, so the lowering of it lowers the value 
of money. 

BANK STATEMENT. In New York City 
a bank statement is issued from the New York 
Clearing House on each Saturday. The weekly 
statement is the collective showing made by 
the banks belonging to the Clearing House As- 



36 THE INVESTOR'S PRIMER 

sociation. This consolidated bank statement 
shows the average deposits, loans, specie, legal 
tenders, circulation, reserve and surplus re- 
serve for the week ending with and including 
Friday. 

The deposits include the credit balances of 
persons and concerns, balances to the credit 
of other banks, and all other money and credits 
subject to withdrawal. The item loans, in- 
cludes money loaned and paper bought, such 
as promissory drafts, etc. Specie includes gold 
and silver coin and also gold and silver certifi- 
cates, which are redeemable in gold or silver. 
Legal tenders means United States notes 
(greenbacks) and treasury notes (notes issued 
for silver bullion, purchased under the so-called 
Sherman act). Circulation means the notes is- 
sued by national banks which are secured by 
government bonds, deposited with the United 
States Treasurer. A bank cannot count circu- 
lation in its reserve, and whether it is its own 
circulation or the circulation of some other 
bank makes no difference. Reserve means the 
amount of specie and legal tenders held. Sur- 
plus reserve is the amount of specie and legal 
tenders held in excess of legal requirement. 
For instance, a national bank in New York 
City must, by law, maintain a reserve equal to 
2$9c of its profits; a State bank must by law 



THE INVESTOR'S PRIMER 37 

maintain a reserve of 15%. In compiling a 
bank statement a reserve of 25% is allowed or 
figured for State banks as well as national 
banks.. The bank statement is said to be made 
up on rising averages when the items in it have 
been increasing in amount during the week; 
or the statement is said to be made up on fall- 
ing averages when the items in it have been 
decreasing in amount during the week. The 
bank statement is favorable or good when it 
shows that the position of the banks has been 
strengthened, as by an increase in the surplus 
reserve through an increase in the cash hold- 
ings rather than by a decrease in the deposits, 
which latter is often affected by the calling of 
loans. As money loaned is largely credited to 
borrowers on their deposit accounts and in- 
creases the total deposits of the banks, so the 
payment of loans by borrowers takes from and 
decreases deposits. It will thus be seen that 
the calling and payment of loans does not in- 
crease cash holdings, but merely changes bal- 
ances in individual accounts. A reduction in 
deposits reduces the amount of cash required 
to be held as legal reserve, and correspondingly 
expands the surplus reserve. 

The bank statement is understood to be 
unfavorable when the position of the banks has 
been weakened, as by a decrease in the surplus 



38 THE INVESTOR'S PRIMER 

reserve through a decrease in the cash holdings 
rather than by an increase in the deposits, 
which often is effected by an expansion in the 
loans, thus correspondingly expanding the de- 
posits and increasing the amount of cash re- 
quired to be held as a legal reserve. The bank 
statement may be said to be favorable, how- 
ever, if an increase in loans is reported when 
the banks have a large surplus reserve. Also, 
it may be said to be unfavorable when money 
is idly accumulating in the banks and deposits 
are increasing, not as a result of increasing 
loans, but in the absence of a borrowing de- 
mand for money. 

In addition to the statement issued by the 
clearing house banks on Saturday there is also 
issued on Monday what is known as the non- 
member bank statement, which shows the con- 
dition of the banks which are not members of 
the clearing house, but which clear through 
members of that institution. The non-member 
statement shows the loans, discounts, invest- 
ments, specie, legal tender notes and bank 
notes, deposits with clearing house agents, de- 
posits with other New York City banks and 
trust companies, net deposits, circulation, capi- 
tal stock and net profits. 

BEAR. A bear in Wall Street is a specula- 



THE INVESTOR'S PRIMER 39 

tor who works to secure or who believes in 
lower prices; in the stock market it is one who 
sells stock short, or advises the selling of stock 
short for the purpose of buying back at a 
lower price. A speculative dealer in grain, cot- 
ton or other commodities may be a bear as well 
as a speculator in stocks. For methods of 
operation pursued by bears see "Selling Short." 

BILL OF EXCHANGE. A written order 
or request from one person to another for the 
payment of money to a third, the amount to be 
charged to the issuer of the bill. There is prac- 
tically no difference between a bill of exchange 
and a draft. The term, however, is commonly 
applied to an order for money payable in a 
foreign country, whereas the term draft is ap- 
plied to an order payable within the country 
of its origin. 

Bills of exchange constitute a most import- 
ant circulating medium. The wholesale trans- 
actions of the world between countries are 
affected by bills of exchange, which are not 
limited like bank notes to the country of their 
origin. When commercial bills of exchange are 
accompanied by bills of lading or warehouse 
receipts, or by other documents, they are of a 
superior nature. They command a lower rate 
of discount, or in other words, bring a better 



40 THE INVESTOR'S PRIMER 

price than bills not secured. In a stringent 
money market they are saleable when other 
bills are refused. See also Foreign Exchange. 

BLIND POOL. When several persons con- 
tribute capital to a pool for operating in stocks 
or bonds, either on the long or short side, and 
only the manager of the pool knows in what 
way the money is to be used, it is known as a 
blind pool. The purpose of such a pool is to 
insure secrecy. Speculative blind pools are not 
uncommon undertakings in Wall Street. 

BONDS. A bond is a certificate of obliga- 
tion usually issued by a corporation to pay 
money secured by mortgage or otherwise. It 
is usually an interest bearing certificate, and is- 
sued in denominations of $1,000. There are 
many kinds of bonds, some being issued by 
corporations, others by municipalities or gov- 
ernments, and still others by individuals. 

The securities issued by governments are 
generally designated as bonds, rather than 
stocks. The United States government issues 
are nowadays known as bonds, although they 
were many years ago known as stocks. Some 
of the securities issued by New York City are 
still designated as stocks, but American mu- 



THE INVESTOR'S PRIMER 41 

nicipalities usually now designate their securi- 
ties as bonds rather than stocks. 

A coupon bond is one both interest and prin- 
cipal of which are payable to bearer. Such a 
bond carries with it a series of coupons, usually 
attached to the bond itself, which are clipped 
off on the respective interest periods and de- 
posited with the banks for collection by the 
holder of the bond in the same manner as 
checks are deposited. A registered coupon 
bond is one which bears the name of the owner, 
and the principal can be paid to him only. The 
interest, however, is still payable to bearer. A 
straight registered bond is one bearing the 
name of the owner whose name is registered 
on the books of the company issuing the bond, 
and the interest payments are made by checks 
forwarded to the address of the owner. 

A gold bond is one which is specifically pay- 
able, both principal and interest, in gold coin; 
a currency bond is one which is payable with 
any kind of money that is legal tender. A large 
bond is one with a denomination of $10,000. 
A small bond is one of a denomination of $500 
or less. 

Investment bonds are issued in various de- 
nominations and at all rates of interest from 
3% up to 7%. There are at least two dozen 
different kinds of investment bonds, such as 



42 THE INVESTOR'S PRIMER 

the various railroad bond issues, public utility 
issues, industrial issues, bonds on mines and 
other enterprises, in addition to government or 
municipal securities. The types and classes of 
bonds are described throughout the pages of 
this book under their own titles or headings. 

BOOKS CLOSE. This relates to the trans- 
fer books for stocks and registered bonds. 
Usually on an advertised date sometime prior 
to the payment of a dividend on a stock the 
transfer books close and the stockholders of 
record on that day receive the dividend when 
it is paid. On and after the day the stock 
books close the stock sells "ex dividend" or 
without the dividend. The transfer books are 
also usually closed on an advertised day prior 
to an election or other stockholders' meeting, 
and only the stockholders of record at the 
closing of the books can vote at that election 
or meeting. A contract in a stock falling due 
during the regular closing of the transfer books 
of the company is settled at maturity by the 
delivery of a certificate and power of attorney ; 
on a contract which is at the option of the 
buyer or of the seller, notice for settlement may 
be given as if the books were open. In case 
the books are closed for a dividend, the person 
entitled to the latter receives a due bill for it. 



THE INVESTOR'S PRIMER 43 

BOOKS OPENED. When the transfer 
books of the company are opened the owner- 
ship of a security can be changed on the rec- 
ord, and at no other time. In other words, 
while certificates can change hands at any time, 
they cannot be formally transferred from one 
holder to another during the period between 
the closing or the opening of the transfer books 
of the corporation. See above under Books 
Close. 

BOOK VALUE. The book value of a 
stock is based on the net profits or deficit of 
the corporation which has issued it. The term 
book value is more frequently used in relation 
to bank stocks than to the stocks of any other 
particular kind of corporation. To ascertain 
the book value of any particular bank stock the 
following process is adopted: If the official 
statement of a bank shows nets profits (surplus 
and undivided profits) equal to say 75% on the 
stock outstanding, then the book value of the 
stock is the original amount of the stock, 100%, 
plus the equivalent in net profits, 75%, or 175. 
If, on the other hand, the bank shows no net 
profits, but instead shows a deficit equal to 
say 10% on the stock, the book value of the 
stock would be only 90. The book value of 
stocks of other corporations is ascertained in 



44 THE INVESTOR'S PRIMER 

the same manner, but is not nearly so simple 
for the reason that it is not usually easy to 
ascertain the uniform facts regarding assets, 
liabilities, surplus, and so forth, and when the 
information is obtainable it is usually too com- 
plex and involved for uniform and intelligent 
use. 

BORROWING AND LENDING STOCKS. 

When a speculator sells stock short or gives 
his broker an order to sell stock short, the stock 
must be borrowed to make delivery to the pur- 
chaser. This is usually a simple matter on the 
exchanges, as there are generally plenty of 
holders who are long of stock and possess cer- 
tificates, who are just as anxious to loan it as 
the one who has sold the certificate short is 
anxious to borrow it. The lender of stock on 
the exchanges receives from the borrower the 
market value of it in money, but except when 
the stock is loaning "flat" or at a premium, 
the lender of the stock pays to the borrower in- 
terest on the money paid for the stock by the 
borrower. On the New York Stock Exchange, 
brokers who have stocks to borrow and to lend 
assemble immediately after the close of busi- 
ness on the Exchange, and those who need 
stocks borrow the amounts necessary to make 
deliveries the next day. Those who neglect to 



THE INVESTOR'S PRIMER 45 

borrow at this time must do so the next morn- 
ing or before the delivery hour at 2.15 p. m. 
The same rules govern the receipt and delivery 
of stocks borrowed and loaned as govern 
stocks bought and sold. In returning bor- 
rowed stock the borrower must notify the 
lender before 1 o'clock on the day of delivery; 
the lender in calling or demanding the return 
of stock is required to do likewise. 

When a stock is loaned "flat," the owner is 
relieved from the cost of carrying the stock. 
If loaned at a premium he is still better off, for 
the premium is clear gain. If a stock that has 
been borrowed advances in market price, the 
lender may require the borrower to pay to him 
the difference between the price at which the 
stock was loaned and the new higher price. 
On the other hand, if the stock declines in 
price, the borrower may require the lender to 
return to him the difference between the price 
at which the stock was borrowed and the new 
lower price. 

When a corner is being worked in a stock, 
it is the practice of those engineering it, freely 
to loan the stock in order to encourage the cre- 
ation of a short interest in it. When this short 
interest has become large enough, or in other 
words, when the stock has become sufficiently 



46 THE INVESTOR'S PRIMER 

oversold, a demand for the return of the stock 
brings the corner to a culmination. 

An apparent borrowing demand for stocks 
is sometimes created by the efforts of money 
lenders to obtain higher interest on their 
money than is obtainable in lending it in the 
money market. If the lending rate for a par- 
ticular stock is 6% when money is loaning at 
4^% in the money market, the money lenders 
will borrow the stock in order to obtain the 
extra interest. 

BUCKETING. As distinguished from the 
manner in which a bucket shop operates (see 
Bucket Shop), bucketing of stocks consists in 
sales by a broker for his own account and risk, 
against a customer's purchase or purchases by 
the brokers, against customer's sales. The pur- 
pose of the broker is sometimes to avoid the 
employment of money in carrying stocks, but 
more often it is to speculate against his cus- 
tomer's trades. In either case the broker wins 
if his customers lose or he loses if his cus- 
tomers win. For example, if the customer 
buys ioo shares of stock at 120 the broker sells 
100 shares at the same price. A cross trade is 
thus made by the broker; the transactions bal- 
ance and the broker does not have to pay out 
the money representing the cost of the stock 



THE INVESTOR'S PRIMER 47 

purchased for the customer. If the customer 
has put up 20% margin, the broker has the 
use of that entire margin for other purposes. 
If the stock goes down to 108 and the customer 
sells while the broker buys, the transactions 
again balance, and the customer loses 2% which 
the broker gains. On the other hand, if the 
stock goes up to 112 and the customer sells 
while the broker buys, the customer makes 
2%, which the broker loses. The broker, how- 
ever, reduces his loss by the extent of the 
commission which he receives from his cus- 
tomer. If the customer loses and the broker 
wins in the above illustration, the broker's gain 
is really 2%% instead of 2%, while if he loses 
and the customer wins his loss is actually only 

There are cases of frequent occurrence where 
some customers of a broker have bought while 
others have sold a given stock on the same day 
and at about the same price. If more has been 
bought than has been sold the broker will sell 
enough to effect a balance; if more has been 
sold than has been bought the broker will buy 
enough to effect a balance. 

BUCKET SHOP. A bucket shop is a place 
where bets are made on regular exchange quo- 
tations. No actual transactions take place. 



48 THE INVESTOR'S PRIMER 

The margin is put up by the customer and a 
commission is charged for buying and selling 
the same as on an exchange. When the quo- 
tation shows a profit to the customer he is 
privileged to demand the profit; when the 
limit of the customer's margin has been 
reached the customer has lost his bet and the 
transaction is closed. There are many large as 
well as small bucket shops in existence in the 
cities of the United States, and an enormous 
amount of trading is done in them. Inasmuch 
as more than 80% of the ordinary speculators 
fail to make money in the long run, it will be 
seen that the chances of money being made 
by the bucket shop are as five to one in com- 
parison with the chances of the customer. In 
ordinary times, therefore, the bucket shop is 
almost sure to make money. It is only in the 
times of great bull movements, when for short 
periods the public in the market cannot help 
but make money in spite of their mistakes, that 
the bucket shop is apt to be on the losing side. 
At such times the bucket shop usually closes 
its doors, for the time being, before it has 
undergone very heavy losses. It is unneces- 
sary to say that bucket shops are illegal, and 
from time to time, as charges are proven 
against them, they are closed up by the civil 
authorities. 



THE INVESTORS PRIMER 49 

BULL. This is the title usually given to 
a speculator in Wall Street whose attitude in 
relation to future prices is optimistic. That 
is, he believes in higher prices and works to 
secure them. A bull is therefore anyone who 
buys or favors buying stocks, grain, cotton or 
any other speculative commodity in the ex- 
pectation of selling it at a higher price. See 
also Bear. 

BUYERS' OPTION. In securities bought 
on the buyers' option the buyer may demand 
delivery of the stock on any day within the 
time specified on one day's notice to the seller. 
The buyer, unless the contract is "flat," pays 
the seller interest at the legal rate on the price 
of the stock up to the day of delivery. No 
contract or buyers' or sellers' option for less 
than four days, or for more than 60 days, can 
be entered into on the New York Stock Ex- 
change. 

CALL. A call on a stock or bond is a con- 
tract or written agreement binding the issuer 
to deliver to the holder the security named in 
the agreement within a specified time at a par- 
ticular price, if the holder shall so demand. 
For example, A signs a promise to deliver 100 
shares of a given stock to B at no at any time 



50 THE INVESTOR'S PRIMER 

within 60 days if B makes a demand for it. A 
sells this privilege to B for, we will say, $200. 
If, within the 60 days, the stock rises in price 
so that B can sell it at a profit above the cost 
of the privilege and commissions for selling, 
B then sells the hundred shares and calls on A 
to make the delivery of the certificate to him. 
Naturally the stock must go above 112^ be- 
fore there is any profit in it for B. If the stock 
declines or does not go above 112^, B does 
not call for it and A makes the $200 on his risk, 
B losing just this amount. See also under 
Privilege. See also Put. 

CALL LOAN. A call loan is a loan which 
is payable on call or demand. In Wall Street 
a very large amount of money is loaned on call 
by the banks to the brokers, the latter in all 
cases supplying collateral to cover the loan. 
By the New York Stock Exchange rules a de- 
mand for the payment of a call loan must be 
made before 1 p. m. on any given day and the 
payment must be made at or before 2.15 p. m. 
the same day. Also notice must be given to the 
loaner of intention to pay a call loan before 1 
o'clock and the payment must be made by or 
before 2.15 o'clock. 

CALLED BOND. A called bond is one 
which carries a clause giving the company is- 



THE INVESTOR'S PRIMER 51 

suing the bond the right to redeem the princi- 
pal at a certain figure and at a certain time. 
Said right having been exercised, interest on 
such a bond usually ceases after the bond is 
called. 

CAR MILES. A railroad term which sig- 
nifies the number of miles traversed within a 
given time by all the cars on a railroad. The 
number of miles traveled by all cars, divided 
by the number of cars, shows the average num- 
ber of miles traveled by each car. Most rail- 
road reports give these figures when sub- 
mitting statements of operations and earnings 
to their stockholders. 

CHARTER. The charter or certificate of 
incorporation of a company is the authority 
conferred upon it by act of legislature which 
allows it to do business along certain lines as 
specified in the charter, which usually defines 
the general purposes and limits the privileges 
of the corporation. 

CLOSE CORPORATION. An incorpo- 
rated company, the stock of which is held by 
the managers or a very limited number of per- 
sons and is not in the hands of the public, is 
usually known as a close corporation. It is 



52 THE INVESTOR'S PRIMER 

sometimes assumed that only small companies 
carrying on limited kinds of business as suc- 
cessors to former partnerships in many cases 
are close corporations. This idea, however, is 
quite erroneous, as there are a good many cor- 
porations, the capitalization of which runs into 
the millions, which are in every essential re- 
spect close corporations. Usually in a close 
corporation there is an agreement or under- 
standing among the few stockholders whereby 
each is prohibited from disposing of or selling 
his interest without the consent of the others. 

COMMERCIAL PAPER As generally 
understood, commercial paper means accept- 
ances and promissory notes. Acceptances are 
drafts or bills of exchange which have been ac- 
cepted. In large cities like New York there 
is a great deal of business done at all times in 
the buying and selling of commercial paper. 
Individual dealers buy from makers at one rate 
of discount and sell to banks and other dealers 
at a lower rate. Good commercial paper repre- 
sents a high class of investment. 

COMMON STOCK. Common stock is dis- 
tinguished from preferred stock in that it has 
no preference as to dividends or assets. It is 
sometimes called general or ordinary stock. 



THE INVESTOR'S PRIMER 53 

When a corporation has an issue of preferred 
stock it is, of course, necessary to give the ordi- 
nary stock the title of common to distinguish 
it from the preferred. If, however, there is no 
issue of preferred or other stock outstanding, 
then the ordinary stock is not referred to as 
"common" but is simply known as plain capi- 
tal stock. Sometimes there are, however, dif- 
ferent kinds of common or ordinary stock, this 
being particularly true of some English issues. 
In such cases, a portion of the issue may be 
called deferred, for the reason that it may re- 
ceive no dividend until a prior portion has re- 
ceived a dividend at a fixed rate. Often it is 
the custom to designate a portion of the issue 
as A stock and a portion as B stock to distin- 
guish the two classes. This employment of A 
and B is also often used in connection with 
different classes of preferred stock. See Pre- 
ferred Stock. 



CONSOL. This term is really an abbrevi- 
ation or contraction of the word consolidated. 
In England, however, it is specifically used in 
connection with the funded debt of Great 
Britain. The debt of this country is in the 
form of stock which represents a consolidation 
of various loans, and is therefore commonly 
known in modern times as English Consols. 



54 THE INVESTORS PRIMER 

This public debt, representing nine different 
loans, was consolidated in 185 1 into 3% stocks 
or, as Americans would say, bonds. In 1888 
the 3%s were converted into 2%% 9 and in 1903 
the rate was reduced to 2y 2 %. The official 
name of English consols is Consolidated An- 
nuities. 

CONTANGO. This is a London Stock Ex- 
change term referring to the charge paid by a 
buyer for the privilege of continuing a contract 
to the next fortnightly settlement. For in- 
stance, y% to % contango means that the bull 
(who is long) pays to the jobber y^% for the 
accommodation and the bear (who is short) 
receives from the jobber %%. One-eighth 
contango to % back (abbreviation for "back 
wardation") means that the bull pays %% and 
the bear pays %%. One-sixteenth to even 
means that the bull pays 1-16% and the bear 
carries over "at even," or in other words, pays 
nothing. Contango day means the first day 
of settlement on the London Stock Exchange, 
when arrangements are made to continue bar- 
gains or contracts. The same as continuation 
day or making-up day. 

CORNER. A corner in a stock is created by 
♦he purchase of all the floating or purchasable 



THE INVESTORS PRIMER 55 

supply of a given stock, after which the price 
can be advanced by the operators of the corner 
at will. Speculators who are short of the stock 
and are unable to buy or borrow to make de- 
livery to buyers, or to return stock which they 
have borrowed, are generally said to be 
"squeezed." In other words, they must settle 
with the buyers at the buyers' terms. Corners 
are created in grain, cotton, coffee and other 
commodities as well as in stocks. 

COUPON BOND. A coupon bond is a bond 
which is payable to bearer without registration 
of the owner's name, and carries a coupon 
covering the interest on the bonds, which is 
clipped at each interest period and deposited 
for collection, the same as a check, or presented 
for payment at the office of the corporation 
issuing the bond or the corporation's agent. 
The great majority of bonds issued by steam 
railroads and other corporations for sale to in- 
vestors are coupon bonds. Coupon bonds are 
much more available for speculative dealings 
and for selling generally. While they are, of 
course, no better secured and intrinsically 
worth no more than registered bonds, yet they 
usually are quoted at a fractionally higher price 
than the latter, for the simple reason that a 
change in ownership involves no formal trans- 



56 THE INVESTOR'S PRIMER 

fer beyond the mere delivery of the bond itself. 
In many cases coupon bonds are convertible at 
the option of the holder into registered bonds, 
and in some instances the registered bond can 
be converted back at will of the owner into a 
coupon bond. This is not, however, true in all 
cases. Many coupon bonds can be registered 
as to principal but not as to interest. 



CUMULATIVE DIVIDENDS. This term 
carries the same meaning as accumulative divi- 
dends. If a dividend on a stock is accumula- 
tive it implies that all back dividends must be 
paid in full before current dividends can be 
paid. In other words, a stock on which the 
dividends are not cumulative can omit to pay 
its dividend when the management sees fit 
and in another year begin to pay a current 
dividend again without regard to the period 
which has gone by during which no dividend 
has been paid. On the other hand, a cumu- 
lative stock must sooner or later pay up all 
back dividends. At least this is the theory, al- 
though naturally if a company does not earn 
the money to make the payments it does not 
pay them, and the back dividends simply accrue 
from year to year on the stock. See also ac- 
cumulative dividends. 



THE INVESTOR'S PRIMER 57 

CURRENT ASSETS. This term, as used 
in connection with the balance sheet of a rail- 
road or other corporation, cover the so-called 
shifting or changeable assets as distinguished 
from the capital assets. In the case of the 
steam railroad, current assets usually include 
cash on hand, loans and bills receivable, ac- 
counts receivable, amounts due from other 
companies and individuals, amounts due from 
companies' agents, advances to other com- 
panies, etc. The capital assets as distinguished 
from the current include cost of road and 
equipment, permanent investments, etc, 

CURRENT LIABILITIES. Current lia- 
bilities as distinguished from capital liabilities 
of a railroad or corporation, include loans and 
bills payable, accounts payable, payrolls and 
vouchers, interest and dividends accrued, 
amounts due to other companies, etc. Capital 
liabilities, on the other hand, cover capital 
stock, bonded debt, mortgages assumed, etc. 

CUTTING A MELON. When a corpora- 
tion makes a large extra distribution to its 
stockholders either in the shape of an extra 
large cash dividend or a stock dividend, it is 
usually said that the company is "cutting a 
melon." 



58 THE INVESTOR'S PRIMER 

DEBENTURE. A debenture, or, as called 
in this country, a debenture bond, is simply a 
certificate of indebtedness or promise to pay 
issued by a corporation. In other words, it is 
not a mortgage. It usually differs from the 
average income bond in that it contains a 
promise to pay a certain amount of interest at 
stated periods. While an income bond is 
sometimes a mortgage and not a debenture, 
yet as it cannot be foreclosed before maturity, 
which may be 50 years away, the position of 
the principal of the two classes of bonds is 
therefore practically the same. In England a 
debenture bond or stock is sometimes secured 
by a mortgage, but not usually. 



DEFAULT. A default on a bond is simply 
the failure to perform or fulfil the obligation to 
pay the interest or principal when due. 
Usually a default furnishes ground for appli- 
cation for a receivership, although in some in- 
stances mortgage bonds carry a clause which 
does not allow the holder to begin foreclosure 
proceedings until the bond has defaulted over 
a certain stated period. For instance, in the 
case of the United States Steel Corporation 
second mortgage 5s, the holder could not be- 
gin foreclosure proceedings until the bond had 



THE INVESTOR'S PRIMER 59 

been in default in the payment of its interest 
for at least two years. 

DISCRETIONARY ACCOUNT. In stock 
speculation a discretionary account is an ac- 
count, the handling of which is intrusted to 
the broker with whom it is open. While there 
are conditions under which it is necessary for 
a broker to act on his own discretion, yet most 
reputable brokerage houses dislike to do this, 
and many of them refuse to. 

DIVIDEND. A dividend is the stockhold- 
ers' share of the divisible profits of a corpora- 
tion, usually paid to him in cash at certain 
stated periods. There are, of course, various 
conditions under which dividends are paid, and 
in many cases they are not paid in cash. For 
instance, a "scrip" dividend is one payable in 
scrip, or in other words in a small certificate 
bearing interest at the legal rate and which is 
usually converted into stock, but has no voting 
power and is entitled to no dividend until con- 
verted into stock. A stock dividend, however, 
is one payable in the stock of the company, and 
is large enough to enable the holder of the 
stock to receive a full certificate and not frac- 
tions or scrip. Cash dividends are usually sent 
by check to the owner of the stock, in whose 



60 THE INVESTOR'S PRIMER 

name the certificate stands. In case the owner 
of the stock has not had his certificate trans- 
ferred to his name before the closing of the 
books, the dividend, of course, is sent to the 
former owner and he must pass it on to the 
new owner. When a speculator is short of a 
stock on which a dividend becomes due, he is 
obliged to pay the amount of the dividend to 
the person from whom he has borrowed the 
stock certificate to make delivery to the per- 
son to whom he has sold the stock. 

EQUITY. The equity in a property is un- 
derstood to be the difference between the 
value of the property mortgaged or otherwise 
encumbered and the amount of the obligation 
to secure which the property is pledged. For 
instance, the equity in a loan is the difference 
between what the securities pledged as col- 
lateral are worth and the amount borrowed on 
them. Securities are usually accepted as col- 
lateral by the banks at about 80% of their 
market value, that is, the lender will usually 
lend $80,000 on securities of the market value 
of $100,000. The difference, of course, between 
the market value of the securities and the 
amount of the loan is the equity. The term 
equity back of the bonds is often used by 
dealers in investment securities, and refers 



THE INVESTOR'S PRIMER 61 

usually to the total market value of all the se- 
curities which may be junior in lien or position 
to the specific security which is referred to. 
Thus, if a property has secured on it a bond 
issue of $10,000,000 and the property itself has 
a capital stock of $40,000,000, the stock being 
quoted at par, then the equity above the mort- 
gage is about $30,000,000. If the stock is 
quoted at 150, the equity above the mortgage 
would presumably be about $50,000,000. 

EXCHANGE. The word exchange in 
finance refers to the payment of an obligation 
in one place by the transfer of a credit from 
another place. By this operation the obliga- 
tion is discharged without the direct borrow- 
ing of money. The exchange itself is an order 
obtained in one place for the payment of 
money in another place. There is really no 
practical difference between a bill of exchange 
and a draft. The term bill of exchange is 
usually applied to an order for money payable 
in a foreign country, whereas the term draft 
is applied to an order payable within the coun- 
try of its origin. 

EX-DIVIDEND This term means with- 
out or not including a dividend. For instance, 
dividends on stocks are usually declared pay- 



62 THE INVESTOR'S PRIMER 

able on a certain day after the transfer books 
of the corporation have closed. This may be 
five days or it may be 30 days. During this 
period the stock cannot be transferred from 
one name to another, and it therefore sells from 
that time on at a new price, which is usually 
measured by the amount of the dividend which 
has been declared and on which the books have 
closed. Thus, unless specifically arranged 
otherwise, no stock during this period will 
carry the dividend which will be mailed when 
the books open, as the dividend goes to the 
owners of stock of record on the day the books 
close. 

EX-INTEREST. This means without in- 
terest or not including interest, and applies 
usually to bonds. Registered bonds sell ex- 
interest in the same way that stocks sell ex- 
dividend when the books are closed. In the 
case of coupon bonds the term ex-coupon is 
used in the same sense. Of course, in the case 
of coupon bonds no books are closed, and the 
bonds sell ex-coupon from the day that the 
coupon is paid and cut off the bond. 

EX-RIGHTS. A stock that is sold ex-rights 
does not convey to the buyer the privilege to 






THE INVESTOR'S PRIMER 63 

participate in any right that may recently have 
been granted to the stockholders. 

FIXED CHARGE. A fixed charge is one 
that becomes due regularly and at stated in- 
tervals and permanently. For instance, in the 
case of railroads, fixed charges include interest 
on bonded debt, interest on floating debt, sink- 
ing fund charges, rentals, taxes, etc. Failure to 
pay these charges usually constitutes a legal 
default and cannot be deferred except by agree- 
ment of all parties concerned. 

FLAT. The term flat is used in relation to 
bonds or other securities which are sold with- 
out interest. That is, the interest is not com- 
puted and added to the price, but is, to a more 
or less extent, embraced in the price itself. In 
other words, the accrued interest, whatever it 
may amount to, is included in the net figure 
which is named as the price. In the stock 
market, when stock certificates are loaned flat 
the lender does not have to pay interest to the 
borrower of the stock. Ordinarily the bor- 
rower of stock pays the lender the market 
value of the stock, and the lender pays interest 
to the borrower on this money. When a stock 
is lending flat it signifies that this particular 
stock is not in adequate supply, or at least it 



64 THE INVESTOR'S PRIMER 

is not easy to obtain by borrowing. When, on 
the other hand, a stock is lending at a pre- 
mium the borrower not only receives no inter- 
est on the money that he advances to the 
lender, but he also has to pay whatever amount 
may be agreed upon for the use of the stock. 
In such a case the stock is very scarce on the 
market or it is very difficult to obtain. 

FLOATING DEBT. The floating debt of 
a corporation is the unfunded indebtedness; 
that is, indebtedness not represented by per- 
manent security. Usually, floating debt con- 
sists of money directly borrowed ; money ov/ed 
for miscellaneous purposes, and money pay- 
able within a short period. 

FOREIGN EXCHANGE. Foreign Ex- 
change is, briefly, the payment of an obligation 
in a given place in one country by the transfer 
of a credit from a given place in another coun- 
try by means of bill of exchange, as for in- 
stance, a bill drawn in New York and payable 
in London. 

For instance, A in London owes $100,000 
or the equivalent in pounds sterling to B in 
New York; likewise C in New York owes 
$100,000 or the equivalent of that sum, to D 
in London. 



THE INVESTOR'S PRIMER 65 

■* 
A in London buys a bill of exchange on New 

York collectible in New York, for the amount 
of his obligation and forwards it to B in New 
York; likewise C in New York buys a bill of 
exchange on London collectible in London for 
the amount of his obligation and forwards it 
to B in London. Thus, both A and C have 
paid what they owed, while B and D have re- 
ceived what is due them, and no money has 
crossed the ocean in settling the accounts. 

A merchant in New York usually pays for 
goods bought in Paris or London with a bill 
of exchange or draft purchased from a bank 
or banker in New York, which is payable by 
the correspondent in London or Paris, as the 
case may be, of the New York bank or banker. 
The bill of exchange thus saves trouble, time 
and expense to the remitter. It is payable in 
French or English money as the case may be, 
and is purchased at the equivalent in United 
States money. Such is the method where ex- 
change is bought. 

Following is an instance where exchange is 
sold: A in New York makes a shipment of 
goods to B in London for which immediate 
payment is to be made. A makes out a draft 
on B for the amount due him and attaching 
to the draft the bill of lading for the goods 
sells the draft to a dealer in foreign exchange 



66 THE INVESTOR'S PRIMER 

in New York, who forwards it to his corres- 
pondent in London for collection from B. 
Thus, A receives pay for his goods as soon as 
they are shipped, and does not have to first 
ship the goods, then wait for them to reach 
London and then wait for a ship to bring back 
gold in payment for them, nor even to wait for 
the mail to bring back a draft bought by B in 
London on some bank or banker in New York ; 
much less has he to wait for B to receive the 
goods, draw a check on his own (B's) bank in 
London and send it to him (A in New York) 
who would have to sell the check to some 
dealer in foreign exchange in New York. B, 
on the other hand, by receiving the bill of 
lading for the goods when the draft is pre- 
sented to him for payment, knows not only 
that the goods have been shipped to him by A, 
but by possession of the bill of lading holds 
actual title to them. 

Bills payable on demand or sight are called 
sight bills; bills payable in ten to thirty days 
are called short bills ; bills payable in sixty days 
or in a longer period are called long bills. 
There are also cable transfers by which money 
(or credit) is transferred by cable. These for 
brevity are called cables. Bills drawn by banks 
or bankers against their credits abroad are 
called bankers' bills. These include letters of 



THE INVESTOR'S PRIMER 67 

credit. Bills drawn against shipments of com- 
modities or manufactures are called commer- 
cial bills. Specifically, grain-bills are drawn 
against grain shipped and cotton-bills are 
drawn against cotton shipped. 

FOUNDERS' SHARES. Shares which are 
sometimes given to the founders and pro- 
moters of a company; such shares generally 
divide the surplus profits with the common 
shares after a certain percentage has been paid 
on the latter. These shares are seldom created 
in this country, being chiefly the result of an 
English custom. 

FRANCHISE. A franchise is a privilege 
conferred by grant from a government or mu- 
nicipality to a corporation or an individual. 
For instance, the right to construct a railroad 
from one point to another and operate the 
same over a given period of years constitutes 
a franchise. Also, a privilege given to a street 
railway, gas or electric light company or water 
company to operate on certain streets or 
within certain limits for a given period more 
or less exclusively, constitutes a franchise. 
These franchises are, in modern times, very 
largely capitalized; the capitalization being 
measured by the value given to the property 



68 THE INVESTOR'S PRIMER 

through its earning power. This earning 
power is of course fluctuating, and as the mu- 
nicipalities grow the earning power usually 
grows also. Therefore the franchise value 
which may have been small when the franchise 
was granted, sometimes grows to a very vast 
extent. Thus, the public utility franchises of 
New York City, many of which were of doubt- 
ful value when granted, have grown to be as- 
sets of enormous value and have been heavily 
capitalized. 



FUNDED DEBT. A funded debt of a cor- 
poration is a debt usually running some years 
and represented by one or more issues of 
bonds. It is distinguished from floating debt 
chiefly by its relatively permanent character. 
While a floating debt may represent capital 
which has been borrowed for permanent uses, 
yet a funded debt nearly always represents this. 
Funded debt is also a term used for the liabili- 
ties of the British government, such as have 
been issued in the form of permanent or long- 
dated securities, as distinguished from the 
floating debt, which is in the form of exchequer 
bonds and treasury bills, and is regarded as 
temporary. This distinction, however, is not 
always clear, as the English War Loan issued 



THE INVESTOR'S PRIMER 69 

in. 1900 and payable in 1910 is called a floating 
debt, but should be rated as funded debt. 

GOLD BONDS. A bond which is specifi- 
cally payable, principal and interest, in gold. 
In the days before 1896, when there was much 
doubt in the minds of investors as to the prob- 
ability of the United States maintaining the 
gold standard, corporations found it necessary 
to insert what was called the gold clause in the 
mortgages they issued. Otherwise investors 
would not so readily purchase the bonds and 
it was difficult to float any issues which did not 
include the gold clause. The reason for this 
was that in the event of the currency system 
of this country going on a silver basis the prin- 
cipal and interest of the bonds would have 
been payable in this depreciated currency, and 
the investor would therefore lose possibly one- 
half of his principal. At the present time the 
gold clause is, of course, unnecessary, as there 
is no doubt whatever about the permanency of 
the gold standard in this country. 

GRANGER RAILROADS. This is the 
Wall Street name which is given to the rail- 
road systems of the west, like the Chicago, 
Burlington and Quincy, Chicago, Milwaukee 
& St. Paul, Chicago & Northwestern, Chicago 



70 THE INVESTOR'S PRIMER 

& Alton, Rock Island, etc. These railroads are 
called granger roads because many years ago 
a wide agitation was carried on by the State 
Grangers in the particular sections where these 
railroads run. The grange agitation was of 
such national interest and for so long a time 
affected the position and earning of these par- 
ticular properties, that they came to be known 
as the granger roads, and have carried the name 
ever since. The mere fact that they carried 
grain had nothing to do with this particular 
appellation, as there are many other roads 
which nowadays carry as much, if not more 
grain than these systems and which are not 
included among the grangers. 

G. T. C. When these letters are used with 
an order to buy or sell stock or commodities, 
they mean that the order is good till counter- 
manded or good till cancelled. 

GUARANTEED BONDS. A bond, the 
payment of the principal and interest of which 
is guaranteed by another corporation. When 
a railroad leases another railroad it frequently 
guarantees the principal and interest on the 
bonds of the leased road. Sometimes this 
guarantee is shown by endorsement on the 



THE INVESTOR'S PRIMER 71 

bond itself and sometimes is simply provided 
for in the lease. 

GUARANTEED STOCK. A stock the 
dividends on which are guaranteed by a com- 
pany other than the one which issued the stock. 
When a railroad leases aother road it fre- 
quently guarantees the dividends on the stock 
of the leased road. 

HOLDING COMPANY. This is the same 
as a security company. That is, a company 
which owns the securities of other companies 
and depends for its income upon the interest 
and dividends yielded by these securities. It 
frequently issues bonds as well as stock itself. 
The most notable example of a holding com- 
pany in the railroad field was that of the North- 
ern Securities Co., which, however, was dis- 
solved as being illegal by the United States 
Courts. It planned to hold the stocks of the 
Great Northern and Northern Pacific Railroad 
companies and possibly of other companies 
also. A holding company is frequently also 
an operating company. For instance, the 
Pennsylvania Railroad is both a holding com- 
pany and an operating company. It operates 
several thousand miles of railroad and in ad- 
dition holds a majority of the stocks and many 



72 THE INVESTOR'S PRIMER 

other securities of a large number of other 
railroads. On the other hand, the Pennsyl- 
vania Company of Pittsburg, itself controlled 
through stock ownership by the Pennsylvania 
Railroad, is a pure holding company, and 
simply holds the stocks and certain other se- 
curities of the various Pennsylvania lines west 
of Pittsburg and Erie. The New York Central 
Railroad is a holding company as well as an 
operating company. This is also true of all 
the large systems such as the New Haven, the 
Union Pacific, Baltimore & Ohio, Illinois Cen- 
tral, etc. The Reading Company on the other 
hand, is simply a holding company, and holds 
a majority of the stocks of railroads like the 
Philadelphia & Reading, New Jersey Central, 
as well as the stocks of certain coal and iron 
companies in the anthracite coal fields. 

HYPOTHECATION. This implies the 
pledging of securities or other property as col- 
lateral for loans. When securities are pledged 
for a loan the title to them is surrendered for 
the time being to the bank or lender with 
which or with whom they are pledged. On the 
London Stock Exchange stock or securities 
pledged as collateral are said to be pawned. 

INCOME ACCOUNT. This is the revenue 
account, and in the case of most corporations 



THE INVESTOR'S PRIMER 73 

it embraces such items as gross earnings, oper- 
ating expenses, net earnings, income from 
other sources, fixed charges and other deduc- 
tions for dividends, dividend charges and sur- 
plus. 

INCOME BASIS. The income basis of an 
investment is the percentage of return on the 
price. As for example, the percentage that the 
interest on a bond or the dividend on a stock 
equals when calculated on the cost of the bond 
or stock. A stock paying 6% which is bought 
at 120 yields 5%, therefore, this stock at 120 
is on a 5% basis. 

INCOME BOND. A bond that is pre- 
sumably a lien on the net income or earnings 
of a corporation after all prior charges have 
been paid. It receives interest only when 
earned, and is somewhat similar in character 
and position to a preferred stock, with the ex- 
ception that a preferred stock usually has 
voting power. An income bond is not usually 
a mortgage, and even when it is, it cannot be 
foreclosed before maturity, provided the pro- 
visions regarding interest payments on earn- 
ings are technically adhered to. 

IRREDEEMABLE BOND. A bond which 
cannot be redeemed or paid off, but the interest 



74 THE INVESTOR'S PRIMER 

on which goes on forever. There have been 
many such issues made by European govern- 
ments and municipalities, but very few have 
been issued in this country. 

JOINT BOND. A bond in which the pay- 
ment of the principal and interest is assumed 
by two or more parties or corporations who are 
jointly bound. There are many such issues 
among railroad bonds. The most frequent in- 
stances are where two or more railroads use 
the same station or terminal property at a 
given point, and jointly issue a mortgage for 
the purpose of expanding or improving the 
said property. The bond is usually issued by 
the terminal company itself, and then jointly 
guaranteed as to both principal and interest 
by the railroad companies which use the prop- 
erty. 

KAFFIRS. This is the London Stock Ex- 
change name for all shares of South African 
mining, land, industrial and other companies. 

KANGAROOS. This is the London Stock 
Exchange name for shares of all West Aus- 
tralian mining, land, industrial and other com- 
panies. 



THE INVESTOR'S PRIMER 75 

KITING. Kiting is, simply stated, the in- 
curring of a fresh obligation to discharge an 
old one. The commonest form of kiting is by 
means of checks. For example, a depositor 
in a bank has issued a check which overdraws 
his account. He makes out another check, 
obtains cash for it elsewhere than at the bank, 
and deposits the cash in the bank in time to 
meet the first check. Two or three days may 
elapse before the second check reaches the 
bank, and before its arrival another check has 
been made out and the cash obtained for it and 
deposited. So the process may continue. 

A person engaged in kiting may arrange to 
exchange checks with one or more persons, and 
thus enlarge the circle of operations to greater 
and greater degrees. He may also gain time 
by sending his check to other places which are 
remote from his bank. It is unnecessary to say 
that check kiting is illegal. 

LISTED STOCKS. Stocks which have 
been placed on the regular list of the New 
York Stock Exchange or other stock ex- 
changes, and are thereby admitted to dealings 
on the exchanges, are commonly known as 
listed stocks. In the case of the New York 
Stock Exchange there are two classes of 
stocks; those known as listed securities and 



76 THE INVESTOR'S PRIMER 

those known as unlisted securities. In order 
that a security may be listed certain rules must 
be conformed to by the company making the 
application, these rules bearing particularly 
upon the financial statement submitted by the 
company. With the unlisted securities, how- 
ever, the case is somewhat different. The lat- 
ter are not obliged to submit details regarding 
their earnings or financial condition. In the 
method or scope of dealings on the floor of the 
exchange there is, hovewer, no difference be- 
tween listed and unlisted securities. 

LOMBARD STREET. A street in London, 
located in the financial district. The name 
Lombard Street, however, applies to the whole 
banking center of London. The name was 
probably originally given to the street for the 
reason that some of the Lombard Jews, who 
began banking in Italy in the Ninth Century, 
afterwards went to London and settled in this 
particular locality. 

LONDON QUOTATIONS. A quotation 
on the London Stock Exchange means the 
price at which the jobber or dealer will either 
buy or sell. Thus, when a jobber quotes 
99/4 — 1 0054 it means that he will buy at 99^ 
or will sell at ioo*4- When, in giving a quota- 



THE INVESTOR'S PRIMER 77 

tion the "middle price" is named, it means the 
price midway between the jobber's buying and 
selling price. In the above quotation the 
middle price would be ioo. On the New York 
Stock Exchange, on the other hand, the quo- 
tations (except "bid" and "asked") are the 
prices at which actual transactions take place. 

LONG ACCOUNT. This term designates 
a stock or other account on the ledger of a 
broker which shows one or more purchases 
made in expectation of a rise in the price of the 
particular security which is in the account. 
The same term also applies to similar pur- 
chases of grain, cotton, coffee, etc. It is just 
the reverse of "short account," the latter desig- 
nating securities sold "short." 

MANIPULATION. In speculation this 
term is applied in a broad sense, to the various 
operations employed for the working of stock 
or other quotations up or down, or both ways, 
as the case may be. Among the familiar 
methods employed for thus affecting the prices 
of securities, is the dissemination of reports, 
sometimes true and sometimes false, to affect 
the prices of particular stocks; the circulation 
of rumors, coloring of news or suppression of 
facts. In the sensitive, mercurial atmosphere 



78 THE INVESTORS PRIMER 

of Wall Street, rumors are often most potent 
in affecting stock quotations, and often prices 
are temporarily changed to a very absurd and 
abnormal extent by such methods. In addition, 
there are other more positive ways of manipu- 
lating prices, a favorite one being what is 
known as "wash sales." "Washing" in Wall 
Street consists of buying and selling a given 
security at the same price and at the same 
time. The operator wishes to advance a stock 
in price and gives to one broker an order to 
bid the stock up on a scale ; that is to say, the 
broker is instructed to offer to buy a certain 
amount of stock, bidding for each lot % of one 
per cent, above the last price paid. At the 
same time, the operator gives another broker 
an order to sell the same amount of stock at 
similar prices. Thus, other things not inter- 
fering, the operator raises the price of the stock 
without actually buying anything. If, on the 
other hand, the operator desires to depress the 
price of a stock, similar methods are employed, 
except that they are reversed. 

Pools are often formed in Wall Street to 
manipulate stocks, in which cases, everything 
is usually done on a much more comprehensive 
scale than when only a single operator is 
carrying on the washing process. 



THE INVESTOR'S PRIMER 79 

MARGIN. The money deposited with a 
banker or broker by an operator or speculator 
in stocks or in grain, cotton, coffee, and so 
forth, to protect the broker against loss. In 
other stocks the amount of margin required 
by a broker varies from 5% to 20% of the par 
value, according to the kind of security dealt 
in, or the character of trading done. The aver- 
age margin is 10%, which is equal to $1,000 
on 100 shares of stock, or on $10,000 of bonds. 

Stocks or bonds bought on margin by a 
broker for a customer are at all times, in the 
absence of an agreement to the contrary, sub- 
ject to the order of the customer. A customer 
•has the right to demand delivery at any time 
of the securities upon payment of the amount 
owing on them, including commissions, inter- 
est and any other proper expenses or charges. 
At the same time, unless there is a specific 
agreement to the contrary, the broker may at 
any time, upon giving proper formal notice, re- 
quire the customer to "take up"; that is, pay 
in full for the stocks or other securities which 
are being carried. If the customer is short of 
stocks the broker may demand that he buy the 
stocks or otherwise close out his account. 

When 100 shares of stock is bought at the 
New York Stock Exchange on a 10% margin 
(the price being $100 per share), the broker 



80 THE INVESTOR'S PRIMER 

executing the order receives the stock and 
pays $10,000 for it to the broker from whom it 
is purchased. The buying broker having re- 
ceived only $1,000 from his customer, thus ad- 
vances $9,000 additional, which he treats as a 
loan to the customer, holding the stock as se- 
curity for the money so advanced. On the 
amount of money so advanced he charges the 
current rate of interest. Should the stock be 
later sold at 115, $11,500 could be received for 
it. The gross profit on such a transaction 
would be $1,500, but from this amount would 
be deducted the broker's commission and the 
interest on the money advanced by the broker. 

In the event of a stock declining below the 
purchase price, the customer is of course re- 
quired to deposit more margin. If he fails to 
do this, the broker has the right to "sell him 
out" ; that is to say, to sell the stock for what 
it will bring, after which he will return to the 
customer whatever balance, if any, is due the 
latter, less whatever commissions, interest or 
other expenses that may have properly been 
charged. 

If a speculator sells a stock short he deposits 
margin the same as he does when he buys a 
stock. If the stock is sold at 100 and is bought 
back at 90 the speculator's profit would be 
$1,000, less the broker's commission. Should 



THE INVESTOR'S PRIMER 81 

the stock advance to any considerable extent, 
the customer is, of course, required to deposit 
sufficient additional cash to keep his margin 
intact ; in the event of his failure so to do, the 
broker may close him out by buying in the 
stock at the lowest price and settling the dif- 
ference, if any, less the commission, etc. 

MATCHED ORDER. A Wall Street term, 
which means an order to buy and sell the same 
stock; such an order is usually employed for 
the purpose of artificially raising or lowering 
the price of a stock. It is the same as stock- 
watering. 

MILEAGE. Means length or distance in 
miles. The road mileage of a railroad is the 
length in miles of the railroad itself. Track 
mileage is the length in miles of the tracks of 
the railroad, each mile of double track being 
counted as two miles; side tracks and switch- 
ing tracks also being counted and included in 
the mileage. Track miles means the same as 
track mileage. 

Train mileage is the number of miles trav- 
ersed by a particular train; or the number of 
miles, collectively, traversed by all trains of a 
railroad. The result attained by adding to- 
gether the number of miles traversed by all 



82 THE INVESTOR'S PRIMER 

trains and dividing by the number of trains 
shows the average number of miles traversed 
by each train. Train miles means the same as 
train mileage. 

Car mileage is the number of miles trav- 
ersed by a particular car; or, again, it is the 
number of miles, collectively, traversed by all 
cars. The result attained by adding together 
the number of miles traversed by all cars and 
divided by the number of cars shows the aver- 
age number of miles traversed by each car. 
Car miles means the same as car mileage. 

Ton mileage is the number of miles the whole 
number of tons are hauled. The average num- 
ber of miles each ton is hauled (transported) 
is ascertained by adding together the number 
of miles each ton is hauled and then dividing 
by the number of tons. Ton miles means the 
same as ton mileage. 

Passenger mileage means the number of 
miles, collectively, traveled by all passengers. 
The number of miles traveled by all pas- 
sengers, divided by the number of passengers 
shows the average number of miles traveled 
by each passenger. Passenger miles means the 
same as passenger mileage. 

MIXED LOAN. A loan secured by col- 
lateral of different character, as railroad and 



THE INVESTORS PRIMER 83 

industrial stocks, instead of railroad stocks 
alone or industrial stocks alone. 

MONETARY. Pertaining to money or 
finance; consisting of money; financial; pe- 
cuniary; as monetary convention, monetary 
union, etc. 

MONETARY STANDARD. The standard 
of value established by law as the basis for 
the money of a country. By long process of 
evolution or natural selection gold and silver 
have been left in possession of the field to the 
exclusion of everything else, and now all the 
monetary systems of the world are based on 
one or the other or both together. Gold, 
however, is rapidly becoming the universal 
standard in law as it has been in fact for many 
years. 

Great Britain first adopted the gold stand- 
ard (1816). One by one the nations have fal- 
len into line, the United States as recently as 
1900, leaving the Latin Union as the most im- 
portant representative of the double standard 
system, while the use of silver is practically 
confined to the Far East and to Mexico and 
some parts of Central and South America. 

The bimetallic system in its unrestricted 
form has proved a failure owing to the wide 



84 THE INVESTOR'S PRIMER 

variation in value between gold and silver, and 
no nation any longer undertakes to coin both 
gold and silver in unlimited quantities. The 
countries which still retain nominally the 
double standard, place severe restrictions on 
the use of silver, and (mint it only on govern- 
ment account, while gold is coined as freely as 
it is offered. 

Thus, gold has become practically the stand- 
ard of the world, for not only do the double 
standard countries restrict the use of silver for 
the purpose of keeping their silver money at a 
parity with gold, but the silver standard coun- 
tries in all international transactions are 
forced to use gold as the basis of exchange. 

The value of a gold coin depends on the 
amount of pure gold it contains; therefore, 
governments in establishing their monetary 
standard and monetary unit declare by law the 
weight and quantity of the coin in which values 
are to be measured. Thus, in the United 
States, where gold is the standard and the dol- 
lar the unit, it is enacted that a gold dollar 
shall contain 23.2 grains of pure gold and 2.6 
grains of alloy, making the weight of the dollar 
25.8 grains of standard gold .900 fine. In Great 
Britain the unit is the sovereign or pound 
sterling and contains 113 grains of pure gold 
and 10.27 grains of alloy, making the standard 



THE INVESTOR'S PRIMER 85 

of fineness .916 2-3 instead of .900 as in the 
United States and most other gold-using coun- 
tries. 

MONEY BROKER. A dealer in coin and 
paper money and in foreign money; also one 
who borrows and lends money for others. 

The regular commission of a money broker 
for negotiating a time loan (a loan for a speci- 
fied time) is 1-32 of 1% of the amount bor- 
rowed or $31.25 on $100,000. The commission 
is paid by the borrower. 

A money broker receives nothing from the 
borrower or the lender for effecting a call 
loan. The reason is that a call loan may con- 
tinue for a day only. The broker expects the 
free negotiation of call loans to bring business 
to him when the borrower on call becomes a 
borrower on time. 

MONEY MARKET. This is a term ap. 
plied to the business of lending money and not 
to a place where money is loaned, for there is 
no specific place (in New York) for lending 
money. 

In New York the banks, trust companies 
and insurance companies are the chief lenders 
of money, but there are other corporations and 
not a few firms and individuals who are lend- 



86 THE INVESTOR'S PRIMER 

ers. As in every other market, supply and de- 
mand are the factors which determine prices, 
or in other words, the rates exacted for the use 
of money. If the demand is large and the 
supply small, rates are high ; if the demand is 
small and the supply large, rates are low. 

Money is stiff when it commands high rates 
of interest. It is tight when it is difficult to 
obtain even at high rates; in these circum- 
stances there is a pinch or stringency in money. 
There is a squeeze in money when it cannot be 
borrowed except at exorbitant rates; in a 
squeeze a premium as well as interest is ex- 
acted on call loans. A premium of %% a day 
and interest (at the rate of 6%) figuring on 
the customary basis of 365 days in a year, 
means a rate equal to 52% a year. 

MONEY RATES. Means the rates of in- 
terest at which money is lending. There are 
different rates for call money (money loaned 
on call — that is, returnable on the demand of 
the lender) and time money (money loaned on 
time — that is, loaned for a specified period). 
The rates for call money are usually lower 
than those for time money. For additional in- 
formation see Call loan; also see Time loan. 

MONOMETALISM. Exists in a country 



THE INVESTORS PRIMER 87 

when the currency of the country is based on a 
single metal, as either gold or silver. 

MORTGAGEE. The grantee under a 
mortgage; the one to whom the mortgage is 
executed. 

MOVABLE EXCHANGE. If foreign ex- 
change is quoted and also is payable in the 
money of the country where collection is to be 
made, it is called movable exchange. For in- 
stance, exchange on Paris is quoted in francs 
in New York and is therefore movable ex- 
change. The dollar is the basis and the franc 
fluctuates instead of the dollar in which it is 
reckoned. The opposite of movable exchange 
is fixed exchange. 

MUNICIPAL BONDS. Those issued by a 
borough, town or city possessed of a charter of 
incorporation conferring privileges of local 
self-government. 

NATIONAL DEBT. Same as public debt; 
the debt due from a nation to individual credi- 
tors. 

The national debt of the United States con- 
sists of bonds, United States notes (green- 
backs), old demand notes (notes issued prior 



88 THE INVESTOR'S PRIMER 

to the present United States notes), national 
bank notes for the redemption of which money 
has been deposited by the issuing banks, frac- 
tional currency, gold certificates, silver certifi- 
cates and Treasury notes (issued for the pur- 
chase of silver bullion). 

NET. Clear of all charges or deductions as 
actual profit or actual loss. The net earnings 
of a stock company are the earnings left after 
deducting expenses. 

Brokers on the outside or curb market in 
stocks often take an order net, which means 
that the customer will deliver or receive the 
stock, as the case may be, at a fixed price. 
The broker receives no commission but is al- 
lowed to make as much on the transaction for 
himself as he can. 

NEW YORK CLEARING HOUSE ASSO- 
CIATION. The official title of the organiza- 
tion under which the associated banks of New 
York conduct daily clearings. 

The association was organized September 
13, 1853, and clearings were begun on October 
11 in the basement of No. 14 Wall Street. The 
first day's clearings amounted to $22,648,109.87 
and the balances to $1,290,572.38. The number 
of banks making clearings was 52. The first 



THE INVESTOR'S PRIMER 89 

manager was George D. Lyman, who had been 
a teller in the Bank of North America. The 
association now owns the handsome white 
marble building Nos. 79 to 83 Cedar Street. 

NEW YORK STOCK EXCHANGE. The 
New York Stock Exchange is an unincorpo- 
rated voluntary association, and while it is not 
a corporation neither is it a partnership. It 
exists, however, under a written constitution 
and by-laws. Neither the constitution of the 
New York Stock Exchange nor the rules and 
regulations of the London Stock Exchange in 
express terms state the object for which those 
bodies were organized, but they are so mani- 
fest that a statement of them has not been 
deemed essential. 

The New York Stock Exchange has its 
origin in an agreement dated May 17, 1792, by 
"Brokers for the Purchase and Sale of Public 
Stock." By public stock was meant govern- 
ment securities; in other words, government 
bonds. At that time the brokers met and did 
business under a buttonwood tree that stood 
in front of the dividing line between the present 
Nos. 68 and 70 Wall Street. In 1817 a consti- 
tution was adopted under the name "New 
York Stock and Exchange Board." On Janu- 



90 THE INVESTOR'S PRIMER 

ary 29, 1863, the present name, "New York 
Stock Exchange," was adopted. 

The membership of the New York Stock Ex- 
change is limited to 1,100. The admission fee 
is $2,000, but this is in addition to the cost of 
a membership itself, which depends on the 
"state of the market" for seats, as member- 
ships are called. A membership is obtained by 
buying the seat of a retiring, deceased or ex- 
pelled member. A member is elected for life, 
or until he resigns or is expelled. 

Expulsion from the exchange forfeits mem- 
bership, but not the proceeds of it. Tempo- 
rary insolvency involves suspension. Perma- 
nent insolvency involves loss of membership, 
and the proceeds of the membership are ap- 
plied to the payment of the claims of creditors 
who are members of the exchange. If there 
is a surplus, it goes to the member or to his 
assignee, if he has been declared a bankrupt. 

When a member dies his seat may be dis- 
posed of by the committee on admission and 
the proceeds delivered to his executor or the 
administrator of his estate. 

NEW YORK STOCK EXCHANGE 
CLEARING HOUSE. The place where the 
differences in the accounts of the brokers on 
the New York Stock Exchange are settled. 



THE INVESTOR'S PRIMER 91 

Before the establishment of the clearing 
house a broker who had made sales of stock 
was obliged to send the stocks to the office of 
the various purchasers and collect payment 
from them. At the same time brokers from 
whom he had bought stocks were obliged to 
send the stocks to his office and collect pay- 
ment from him. A broker may have made 
sales to the amount of $500,000, and purchases 
to the amount of $475,000. He was compelled 
to make collections and payments for the full 
amounts, whereas under a clearing house plan 
he might have settled all the transactions in 
one operation, and by the payment of only the 
difference of $25,000. 

Now, a broker, at the end of each day, makes 
up a sheet called a clearing house sheet, con- 
taining his purchases and sales. On one side 
of the sheet (the left hand side), the broker 
puts down his purchases, each purchase having 
a line for itself. In each transaction the name 
of the broker from whom the purchase was 
made comes first and then in order follow the 
numbers of shares, the name of the stock, the 
price at which purchased, and finally, the 
amount in dollars of the purchase. This side 
of the sheet is headed "Received from," mean- 
ing that the broker has contracted to receive 
the stocks enumerated. 



92 THE INVESTOR'S PRIMER 

The other side of the sheet (the right hand 
side) contains the list of stocks sold (made out 
in the same order as the list of stocks bought), 
and this side of the sheet is headed "Delivered 
to," meaning that the broker has contracted to 
deliver the stocks enumerated. 

If his purchases amount in money to more 
than his sales, he accompanies his sheet with 
a check drawn on his own bank and payable to 
the clearing house bank (a bank in which the 
clearing house account is kept). If his sales 
amount in money to more than his purchases 
he accompanies his sheet with a draft on the 
clearing house bank, which is accepted by the 
manager of the clearing house (made collect- 
able by the indorsement of the manager). This 
draft is returned to the broker and is deposited 
by him in his own bank for collection in the 
ordinary course. 

If the broker has bought more of any par- 
ticular stock than he has sold or sold more 
than he has bought, there is a stock difference 
(as well as a money difference) to be settled, 
but the settlement of this stock difference is 
provided for when the sheet is made up. If, 
for instance, the broker has bought 200 shares 
of a certain stock and has sold 100 shares he 
receives the difference or balance of stock, 
which is 100 shares. Some other broker who 



THE INVESTOR'S PRIMER 93 

sold 100 shares more of the stock in question 
than he bought is directed by the manager of 
the clearing house to deliver this extra 100 
shares to the first broker. The first broker 
credits himself on his sheet with the amount 
in money of this stock at the settling price, 
while the second broker charges himself with 
the amount of it on his sheet. 

The settling price is an arbitrary price fixed 
by the manager of the clearing house. Each 
day at the close of business the manager of the 
clearing house sends out through the ticker the 
settling prices for the various stocks for the 
use of brokers in making up their clearing 
house sheets. In their use in making up the 
sheets they are called making-up prices; in 
their use in making settlements they are called 
settling prices. These settling prices are the 
even prices next nearest to the last prices of the 
day. Thus, if the last price of a stock was 
99^4 or 100% the settling price would be 100. 

The broker who bought 200 shares may have 
bought them at 99^, and the 100 shares which 
he sold may have been sold at 100%. If the 
settling price was 100, he would put down the 
extra 100 shares due him in the sold column 
at 100, the same as if he actually had sold the 
stock at 100. 



94 THE INVESTOR'S PRIMER 

Then his account would figure out thus: 
Bought 200 at 99^, which equals $19,900; sold 
100 at 100^ and 100 at 100, which equals $20,- 
050. The difference is $150, which the broker 
collects by draft on the clearing house. Had 
he not included the 100 shares at 100 he would 
have owed $8,850. To the broker who delivers 
the 100 shares to him at 100 he gives a check 
for $10,000. 

This particular part of the operation (the 
delivery of the stock and collection for it), is 
wholly outside of the clearing house. Deduct- 
ing from this $10,000 the $150 received in the 
clearing house settlement, his net payment is 
$8,850, exactly what it would have been had he 
not included the 100 shares at 100 in the clear- 
ing house sheet. 

No matter if the broker bought more stock 
than he sold, or sold more than he bought, or 
what the prices may be or how many stocks 
may be included in his sheet, the system em- 
ployed in clearing his sheet accomplishes its 
end. Inasmuch as the differences both in cash 
and stocks are provided for in the clearing 
house sheet, there is, when the general settle- 
ment is concluded, no balance left of either 
cash or stock. There was, of course, as much 
of each stock sold as was bought, because there 
was a seller as well as a buyer at the same 



THE INVESTOR'S PRIMER 95 

price in each individual transaction, and, ac- 
cordingly, there was as much receivable in the 
aggregate as there was payable. Both sides 
of every account are bound to balance or equal- 
ize when the differences in the stock and 
money are figured out and put down in the 
proper places. 

The broker who is short of stocks in his 
sheet (who sold more than he bought), must 
borrow the stocks that he is short of for the 
deliveries which he is directed by the manager 
of the clearing house to make. 

Not all stocks that are dealt in on the New 
York Stock Exchange are cleared through the 
stock exchange clearing house. Only those oil 
the clearing house list are cleared. The stocks 
on this list are the ones actively (largely) 
dealt in. If an inactive stock becomes active 
it is put on the list; if an active stock be- 
comes inactive it is taken off the list. 

Transactions in stocks not on the clearing 
house list are not reported to the clearing 
house at all. Settlements in these stocks are 
made between the brokers in the ordinary 
course of business. For another thing, only 
stocks bought and sold "regular way" (in the 
regular way) and at seller 3 are cleared. 

Stocks bought and sold "regular way" are 
put on the clearing house sheet on the day 



96 THE INVESTOR'S PRIMER 

they are bought and sold, but are deliverable 
on the following day. Stocks bought and sold 
at seller or buyer 3 are not delivered until the 
third day after they are sold, and are not put 
on the clearing house sheet until the second 
day after they are bought and sold; they are 
put on the clearing house sheet at the selling 
price on the second day. 

NON-ASSENTED STOCK OR BONDS. 

Stock or bonds which the owners refuse to de- 
posit under an agreement by which their 
status will be changed. For additional in- 
formation see Readjustment. 

NON-CUMULATIVE STOCK. Stock on 
which dividends, if not paid, do not accumu- 
late — that is, if dividends are not paid for a 
period they have not subsequently to be paid 
for the period when they were not declared. 

NON-INTEREST-BEARING. Bearing or 
paying no interest. The money issued by the 
United States government, since the govern- 
ment pays no interest on it, is a non-interest- 
bearing obligation; the bonds issued by the 
United States government, since the govern- 
ment pays interest on them, are interest-bear- 
ing obligations. 



THE INVESTOR'S PRIMER 97 

NOTE BROKER. One who effects the sale 
of promissory notes. A note broker is differ- 
ent from a money broker. The commission of 
a note broker is generally % or % of 1% of 
the amount of the note. This commission is 
paid by the one for whom the broker sells the 
paper. The buyer pays no commission. 

ON A SCALE. A term used in speculative 
operations in stocks, meaning buying or sell- 
ing, as the case may be, at stated intervals, in 
prices as prices decline or advance. For in- 
stance, buying at 100, 98, 96, 94 and 92 would 
be buying on a 2% declining scale. Reversing 
the order of prices would be buying on an 
ascending scale. The operation of selling on a 
scale is conducted in the same fashion. 

ON MARGIN. When stocks are bought or 
are sold short on margin a percentage of the 
par (face) value, say 10%, is deposited with 
the broker to secure him against possible loss. 
The amount deposited is margin. 

For information as to margin or speculative 
operations in stocks bonds, grain, lard, pork, 
short ribs, cotton, coffee and silver bullion 
see margin. 

OPTION. Property bought or sold to be re- 
ceived or delivered by the buyer or seller in 



98 THE INVESTOR'S PRIMER 

accordance with the terms agreed upon. 
Sometimes the buyer pays for the privilege of 
calling for the delivery of the property within 
a certain time if he so wills, but he is not 
obliged to take it; sometimes the seller pays 
for the privilege of delivering the property. 

In speculation an option is the purchased 
privilege of either receiving or delivering a 
specific amount of anything (as stocks, grain, 
cotton, coffee, etc.) at a specified price within 
a specified time. 

In stocks bought on the buyer's option the 
buyer may, when the option is for four days or 
more, demand delivery of the stock on any day 
within the time specified on one day's notice to 
the seller. In stocks sold on seller's option, 
when the option is for four days or more, the 
seller may deliver the stock to the buyer on 
any day within the time specified on one day's 
notice to the buyer. 

When a dividend becomes due on a stock 
during the pendency of an option on it the 
dividend is collected by the seller of the stock, 
who holds it, allows interest on it and pays the 
dividend, with the interest on it, to the buyer 
on the settlement of the contract. When an 
option on a stock matures during the closing 
of transfer books, the seller of the stock gives 
to the buyer of the stock a due bill for the 



THE INVESTOR'S PRIMER 99 

amount of the dividend which is payable when 
the dividend is paid, but the due bill does not 
bear interest. 

OPTIONAL BOND. A bond maturing 
(expiring) at a specified date, but which may 
be redeemed (paid and cancelled) after a 
designated date at the pleasure (option) of the 
company (or government) issuing it. Thus, a 
bond maturing in fifty years, but which may 
be redeemed after ten years, is an optional 
bond. 

ORDINARY STOCK. Common or general 
stock. In Great Britain, when an ordinary 
(common) stock has been divided into two 
parts, one part, called deferred, receives no 
dividend until the other part, called preferred, 
has received a dividend at a fixed rate. The 
deferred stock is called A stock and the pre- 
ferred stock is called B stock. 

This B or preferred stock is not the same as 
preferred stock in the United States. What in 
the United States is called preferred stock is in 
Great Britain called preference stock, and 
preference stock in Great Britain may be di- 
vided into two or more classes called first 
preference, second preference, etc., just as pre- 
ferred stock in the United States may be di- 



100 THE INVESTOR'S PRIMER 

vided into two or more classes called first pre- 
ferred, second preferred, etc. When, how- 
ever, there is but one class of preference stock 
ahead of an ordinary stock in Great Britain, 
the B or preferred stock is equivalent to sec- 
ond preferred stock in the United States. 

OUTSIDE BROKER. A broker who is not 
a member of an exchange; one who deals in 
securities that are not dealt in on a stock 
exchange. A dealer in the outside market 
or on the curb is an outside broker. In New 
York such a broker is not a bucket shop 
keeper; see Bucket Shop. In London an out- 
side broker is one who is not a member of the 
London Stock Exchange, and is sometimes 
described as a bucket shop keeper. Many Eng- 
lish outside brokers, however, conduct a per- 
fectly legitimate business. 

PAR. The face value. On the New York 
Stock Exchange if the face value of a stock is 
$100 it is at par when it is selling at 100. It is 
above par when it is selling at a higher price, 
as 101 ; it is below par when it is selling at a 
lower price, as 99. Half-stock (stock of the 
face value of $50) also is at par when it is 
quoted at 100% which in this case means $50. 
The face value of a stock is divided into 100 



THE INVESTOR'S PRIMER 101 

parts for quotation purposes, no matter what 
the face value may be, and each part is called 
1% or 1 point. Therefore, when a half-stock 
is quoted at 101 it is one point above par, which 
means that the stock is worth $50.50 a share; 
when it is quoted at 99 it is 1 point below 
par, which means that the stock is worth $49.50 
a share. The same principle applies to quar- 
ter stock (stock of the face value of $25) and, 
in brief, to stock of any face value. 

In some markets stocks are quoted in dol- 
lars instead of by percentage. Thus, in such 
markets if a stock of the face value of $100 is 
selling at 100 it is at par; if selling at 101 it is 
1 point above par ; if selling at 99 it is 1 below 
par. Likewise, if a stock of the face value of 
$50 is selling at 50 it is at par; if selling at 51 
it is 1 above par; if selling at 49 it is 1 below 
par. So, also, if a stock of the face value of 
$25 is selling at 25 it is at par; if selling at 26 
it is 1 above par ; if selling at 24 it is 1 below 
par; and so on. 

PAR OF EXCHANGE. The par of foreign 
exchange is the fixed intrinsic value of the cur- 
rency unit (monetary unit) of one country ex- 
pressed in the terms of the currency of an- 
other country which uses the same metal as a 
standard of vialue. Thus in United States gold 



102 THE INVESTOR'S PRIMER 

money is 4.11 shillings, or 4 shillings 1.31 pence 
in English gold money, or 5 francs 18.26 cen- 
times in French gold money, or 4 reichmarks 
(marks) 19.79 pfennig in German gold money, 
or 2 guilders (florins) 48.78 cents in Nether- 
lands (Holland) gold money, and so on. 

If the price paid for a bill of exchange just 
equals the amount for which it is drawn, then 
exchange is at par ; if more is paid exchange is 
above par ; if less is paid exchange is below par* 

Between a gold standard country and a 
silver standard country there can exist no fixed 
par of exchange, for the reason that silver, un- 
like gold, has not a fixed value ; in other words, 
silver being merely a commodity, its value de- 
pends on the state of the market for it. 

PARTICIPATING BOND. Comparable 
to an income bond, inasmuch as the return to 
the holder in interest depends on the extent of 
the revenues so applicable. 

The first bonds to bear this name were is- 
sued in 1902, and were designated "4 per cent, 
and participating bonds." These bonds were 
in effect collateral as well as income bonds. 
The company which issued the bonds owned 
stock in another company, and this stock was 
deposited and pledged as security for the prin- 
cipal of the bonds. Interest at 4% was guar- 



THE INVESTOR'S PRIMER 103 

anteed by the company which issued the bonds 
and the bonds were also entitled to receive in- 
terest in excess of 4% as permitted by the divi- 
dends paid on the stock securing the bonds 
beyond the amount necessary first to provide 
for the 4% as guaranteed. 

PASSENGER DENSITY. A term used in 
railroad accounting, meaning the result ob- 
tained when the total number of miles of pas- 
sengers carried is divided by the number of 
miles of road operated. 

PASSENGER MILES. A railroad term; 
the number of miles, collectively, traveled by 
all passengers. The result attained by adding 
together the number of miles traveled by all 
passengers shows the average number of miles 
traveled by each passenger. Passenger mile- 
age means the same as passenger miles. 

PASSING A DIVIDEND. Failure to de- 
clare a dividend that had previously been regu- 
larly paid. When the directors vote not to pay 
a dividend that previously had been regularly 
declared the dividend is stopped; when the 
dividend simply is not declared it is passed. 

PLAIN BOND. A bond not secured by 
mortgage or collateral and without a sinking 



104 THE INVESTOR'S PRIMER 

fund provision. A debenture bond being (as a 
rule) merely a promissory note in the form of 
a bond is a plain bond. 

POOL. This term applies when interests 
join together for mutual advantage. 

The anthracite coal pool, as it formerly ex- 
isted, was an agreement whereby each com- 
pany belonging to the pool was to mine a cer- 
tain percentage of the total production. The 
production for each month was determined in 
the preceding month. The purpose of the pool 
was regulation of both output and prices. By 
restricting the output to the consumptive de- 
mand, control of prices was accomplished. A 
schedule of prices was prepared for each month 
and all the companies made sale of coal in ac- 
cordance with it. The anthracite coal pool 
was declared illegal by the courts on the 
ground that it was in restraint of trade. 

PREFERENCE STOCK. This is the Eng- 
lish designation for stock that is preferred over 
other classes as to dividends and assets. It is 
equivalent to what in the United States is called 
preferred stock when there is only one class of 
preferred stock, or to what is called first pre- 
ferred when there are two classes. Preference 
stock is sometimes divided into classes, as first 



THE INVESTOR'S PRIMER 105 

preference, second preference, etc., with the 
right to dividends in the order named. 

PREFERRED ORDINARY STOCK. 

English — also called B stock — receives a divi- 
dend at a fixed rate before any payment can 
be made on the deferred ordinary stock. For 
additional information see Preferred Stock. 

PREFERRED STOCK. Stock that is pre- 
ferred as to dividends and assets; it must re- 
ceive a dividend before a dividend can be paid 
on the common stock, and in a distribution of 
assets it participates ahead of the common 
stock. Cumulative preferred stock is stock 
the dividends on which, if not paid regularly 
or in full, accumulates, and must be paid in 
the future before a dividend can be paid on the 
common stock.. Preferred stock is the English 
designation for preferred ordinary (common) 
stock. When for dividend purposes the ordi- 
nary stock of a company has been divided into 
two parts called preferred or "B" stock and 
deferred or "A" stock, the dividend on the "A" 
stock is deferred until a fixed amount has been 
paid on the "B" stock. 

This "B," or preferred stock, is not the same 
as preferred stock in the United States. What 
in the United States is called preferred stock 



106 THE INVESTOR'S PRIMER 

is in Great Britain called preference stock, and 
preference stock in Great Britain may be di- 
vided into two or more classes called first pref- 
erence, second preference, etc., just as pre- 
ferred stock in the United States may be di- 
vided into two or more classes called first pre- 
ferred, second preferred, etc. When, however, 
there is but one class of preference stock ahead 
of an ordinary stock in Great Britain, the "B," 
or preferred stock, is equivalent to second pre- 
ferred stock in the United States. 

Preference stock is sometimes divided into 
classes, as first preference, second preference, 
etc., with the right to dividends in the order 
named. 

PREMIUM. The amount named in excess 
of the par (face) value. When a stock, for in- 
stance, is selling at a premium, the premium 
is the amount it brings beyond its par or face 
value. When a stock is lending at a premium 
(see Borrowing and Lending Stocks), the pre- 
mium is the amount paid by the borrower of 
the stock to the lender of it for the use of it. 
The purpose, usually, for which a stock is bor- 
rowed is to enable the borrower, who has sold 
it short (sold stock he did not possess), to 
make delivery to the purchaser. 

In Great Britain when a stock or other se- 



THE INVESTOR'S PRIMER 107 

curity is at a premium the premium is reck- 
oned at so much in the pound on shares and at 
a percentage on stock or bonds. 

In insurance in Great Britain the premium is 
the consideration paid by the policy holder for 
insurance. Thus, a premium of 20 shillings 
per cent, means that 20 shillings is the premium 
on each £100 insured. 

PRINCIPAL. The capital sum upon which 
interest is payable; also, the one who employs 
a broker or other agent. 

A principal is responsible for the act of an 
agent, but an agent who exceeds his authority 
renders himself personally liable. 

A person who has given money to his own 
agent to be delivered to his creditor cannot set 
up the claim that he has paid his creditor un- 
less the money actually reaches the creditor. 
In other words, while the money is in the con- 
trol of the agent of the debtor it is at the debt- 
or's risk, and it cannot be charged against the 
creditor any more than if it remained in the 
debtor's own hands. 

PRIVILEGE. A general name for a call, 
put, spread or straddle, information as to each 
of which is furnished under its own title. 



108 THE INVESTOR'S PRIMER 

There can be no loss to the buyer of a privi- 
lege beyond the amount paid for it. Privileges 
are legal and are enforceable as contracts, but 
they are not recognized by the New York 
Stock Exchange. 

Privileges are often bought as a protection 
against loss on transactions in the stock 
market. Illustration: One hundred shares of 
stock are bought at 100. A put under which 
the stock can be delivered at 98 is purchased 
for 1%, which makes the net price of the put 
97. Then, if the stock goes down to say 94. 
the stock owned by the holder of the put can 
be put (delivered) to the issuer of the put at 
98 so that the net loss is only 3% instead of 
6%, as would be the case if no put had been 
bought and the stock had to be sold at 94. On 
the other hand, should the stock go up to say 
106, only the cost of the put would have to be 
deducted from the profit on the stock. 

In the case of a stock sold short a call would 
be employed for protection against loss. If 
the stock were sold short at 100 and if a call at 
102 were purchased for 1% and the stock ad- 
vanced to 106, the net loss would be only 3%, 
as against 6% if no call had been purchased 
and the stock had to be covered (bought back) 
at 106. If the stock against which the put was 
bought went down to 94, only a deduction of 



THE INVESTOR'S PRIMER 109 

1%, the cost of the put, would have to be made 
from the profit on the stock. 

Calls and puts on grain are based on the 
same general principle as those on stocks, but 
they are not employed to any extent except to 
limit loss. In some states puts and calls on 
grain are illegal. 

PROXY. A person who is empowered to 
represent another in a given matter ; the name 
is also given to the instrument by which a per- 
son is empowered so to act. 

A person who votes by proxy on stock be- 
longing to another is said to hold a proxy on 
the stock. 

PUT. A put (on a stock) is a contract or 
written agreement binding the issuer to receive 
from the holder, stock named in the agreement 
within a certain time at a certain price if the 
holder shall so demand, or in other words, 
shall elect to deliver (put) the stock. For ex- 
ample, A signs a promise to receive 100 shares 
of some specified stock from B at 100 at any 
time within 60 days if B so demands. A sells 
this promise to B for, say $100. If, within the 
60 days, the stock falls in price so that B can 
buy it at a profit, B buys it at the lower price 
and calls on A to receive the stock. The stock 



110 THE INVESTOR'S PRIMER 

must go below 99 before there is a profit for 
B. If the stock advances or does not fall be- 
low 99, B, of course, does not deliver (put) it 
and A makes $100 on his risk. In delivering 
the stock B must give one day's notice, except 
on the last day, when no notice is required. 

If a dividend becomes due on a stock during 
the pendency of a put on it the dividend goes 
to the seller of the put if the stock is put (de- 
livered) to him. A dividend always goes with 
the stock. 

A put on grain or any other speculative com- 
modity is based on the same general principle 
as in the case of stocks. 

PYRAMIDING. A system of enlarging 
operations by use of paper profits (profits in 
transactions not yet closed and consequently 
not yet in hand). 

Illustration : One hundred shares of stock of 
the par value of 100 is bought at 10 on a mar- 
gin of 5%. The stock advances to 15. There 
is a profit of 5% which can be used as margin 
in the purchase of 100 shares more. The price 
goes up to 20. There is then a profit of 5% on 
the second lot and an additional profit of 5%' 
on the first lot, so that there is an unencum- 
bered profit of 10% on 100 shares or 5% on 
200 shares. The profit is utilized as margin for 



THE INVESTOR'S PRIMER 111 

the purchase of 200 shares more. The price 
goes up to 25. Then there is an unencum- 
bered profit of 5% on the whole 400 shares or 
20% on 100 shares. This profit is used to buy 
400 shares more. 

Then, perhaps, the price drops to 20. There 
being only 5% margin on the whole 800 shares 
the whole accumulated profit of $3,500 disap- 
pears, as well as the margin of 5% provided 
for the purchase of the first 100 shares. Should 
the price go on up to 30, however, the profits 
would be increased by $4,000, which would 
provide 5% margin for 800 shares more of 
stock, making the total amount of stock held 
1,600 shares, 1,500 of which would have been 
purchased with profits. 

Selling stock at intervals on a decline, using 
profits for margin, is pyramiding, as well as 
buying it on profits on an advance. 

RAILROAD EARNINGS. In compiling 
railroad reports the total earnings or receipts 
from traffic are set down as gross earnings and 
the remainder, after deducting operating ex- 
penses (cost of handling traffic), is net earn- 
ings. To net earnings is added other income 
(usually derived from investments, which are 
often in the form of securities held to control 
other roads) and the total is gross income (as 



112 THE INVESTOR'S PRIMER 

distinguished from gross earnings). From 
gross income are paid rentals and other 
charges, interest requirements (commonly 
called fixed charges), etc. The remainder is 
designated as net income. From it are paid 
dividends and what is left is surplus. 

In reporting gross earnings it is the practice 
to divide each month into four weeks. The 
first seven days are counted as the first week, 
the second seven days as the second week and 
the third seven days as the third week, while 
the remaining days of the month are counted 
as the fourth week. In a month of 30 days the 
fourth week consists of nine days, and in a 
month of 31 days it consists of ten days. Thus, 
the fourth week may contain two Sundays. 

The custom is to compare railroad earnings 
in a given period with those in the correspond- 
ing period in the year before. Railroad traffic 
is light on Sunday, so that when a fourth week 
containing two Sundays is compared with a 
fourth week containing only one Sunday, or 
vice versa, allowance must be made for the 
difference in the number of working days 
(week days). Likewise, in a monthly report 
of earnings a month may contain five Sun- 
days, whereas the same month in the pre- 
ceding year may have contained only four Sun- 
days, or the reverse. 



THE INVESTOR'S PRIMER 113 

A railroad as a rule makes a weekly report 
of gross earnings; it makes a monthly report 
of gross and net earnings, with deductions for 
charges of all kinds, so that a monthly report 
takes account of everything in the month in 
question; and finally, the road makes a yearly 
(annual) report which is a consolidation of the 
twelve monthly reports with details added, and 
with remarks by the president and other of- 
ficials. 

READJUSTMENT. Sometimes called 
simple adjustment ; a readjustment is when the 
financial reconstruction or rehabilitation of a 
railroad or other corporation is voluntary — 
that is, by concurrence of the security holders. 
Reorganization, as distinguished from read- 
justment, is when the financial reconstruction 
is compulsory — that is, when it is effected by 
a receivership and foreclosure. 

In a readjustment (a financial reconstruction 
that is voluntary) bondholders may exchange 
their bonds for new bonds bearing a lower 
rate of interest than the old ones, but in such a 
case the loss in interest is compensated for by 
the delivery to the holders of the bonds who 
make the exchange of a bonus in (a gift of) 
stock or in some other security, such as in- 
come bonds (income bonds receive interest 



114 THE INVESTOR'S PRIMER 

only if earned). Or, the bondholders may ex- 
change their bonds for a smaller amount of 
new bonds, receiving stock or income bonds 
as compensation for the surrender of a portion 
of their holdings. 

Again, cumulative stock may be exchanged 
for a larger amount of non-cumulative stock. 
Or, the exchange may be on even terms, with 
compensation for the surrender of the cumu- 
lative right on the stock. 

The compensation usually takes the form of 
a bonus of some kind as, for instance, income 
bonds. 

Financial readjustments without foreclosure 
to enforce them are not numerous. 

Bonds and stocks, the holders of which 
agree to accept the terms of a readjustment 
plan, are termed assenting bonds and stock; 
bonds and stock the holders of which do not 
accept the terms of a readjustment plan are 
termed non-assenting or unassenting bonds 
and stock. 

REGISTERED BOND. A registered bond 
is one registered in the name of the owner, and 
the bond itself bears his name. Such a bond 
is transferable the same as a stock certificate. 
The bond itself contains a form for assignment 
and transfer. When a registered bond is trans- 



THE INVESTOR'S PRIMER 115 

ferred a new bond is issued for the old one just 
as when a stock certificate is transferred a new 
certificate is issued for the old one. 

The interest on a registered bond is paid by 
check, which is sent by mail to the postoffice 
address of the owner of the bond. Due notice 
of change of address should, therefore, be 
given. The old address should be given as 
well as the new one. 

There are some registered coupon bonds, but 
such issues are not numerous. 

REGISTERED COUPON BOND. A bond 
the principal of which is payable only to the 
one whose name is inscribed on it, and in whose 
name also the bond is registered (entered on 
the books of the company issuing it), while the 
coupons calling for the payment of the interest 
as it becomes due, are payable to the bearer. 

REHYPOTHECATION. The hypotheca- 
tion again of collateral already hypothecated. 
Rehypothecation, except by consent of the 
owner of the collateral, is illegal. 

RELEASED INDORSED BOND. Any 

indorsement on a coupon bond stating that it 
has been deposited as security for bank circu- 
lation (bank notes) or for insurance require- 



116 THE INVESTOR'S PRIMER 

ment may be released by an acknowledgment 
of the release before a notary public; it will 
then be a delivery in accordance with New 
York Stock Exchange rules as a released in- 
dorsed bond. 

REORGANIZATION. When the financial 
reconstruction or rehabilitation of a railroad or 
other corporation is voluntary — that is, by 
concurrence of the security-holders — the term 
readjustment applies. When the financial re- 
construction is compulsory — that is, when it 
is effected by a receivership and foreclosure — 
the term reorganization applies. Most recon- 
structions are compulsory ; they seldom can be 
effected except by legal process following in- 
solvency. 

The method of reorganization is ordinarily 
as follows : After default has been made in in- 
terest on bonds, say the first mortgage bonds, 
a receiver is appointed, after which a plan 
of reorganization is formulated. Provision 
usually is made in the plan whereby the first 
mortgage bonds, together with the accumu- 
lated unpaid interest, are to be paid in full. 
Such holders as may desire to do so take for 
their bonds, bonds of a newly formed com- 
pany, with perhaps stock for the unpaid in- 
terest. Such holders as prefer cash for their 



THE INVESTORS PRIMER 117 

bonds and unpaid interest are paid in cash. 
It sometimes is the case that the holders of 
bonds who take bonds of the new company for 
their old bonds receive the unpaid interest in 
cash. 

The money to pay those bondholders who 
prefer cash (and to pay unpaid interest if it is 
to be paid in cash) and to provide other needed 
funds and working capital, is raised by levying 
an assessment on the stock (on the holders of 
the stock at so much per share). Then an 
order for sale of the property under fore- 
closure is obtained from the court (the prop- 
erty being under the control of the court after 
the appointment by it of a receiver). 

The sale wipes out the bonds and the stock. 
The proceeds of the sale, however, must go to- 
ward the liquidation of the mortgage debt. 
The property (generally) is bid in by a com- 
mittee of the bondholders for the benefit of the 
bondholders. The reorganization plan (gen- 
erally) is primarily in the interest of the bond- 
holders and only secondarily in the interest of 
the stockholders. 

REPUDIATION. The rejection, in whole 
or in part, of a contract, debt or obligation. 
The term applies in particular to the rejection 



118 THE INVESTOR'S PRIMER 

or mandatory scaling of its debt by a govern- 
ment. 

The repudiation, as applied to the rejection 
of a debt by a state, was first used in 1841 
when the state of Mississippi repudiated bonds 
issued to railroad companies which failed to 
comply with conditions on which they received 
them. 

RUPEE PAPER. Securities of the govern- 
ment of India, interest and principal being pay- 
able in rupees in India and by bills of ex- 
change on Calcutta in England. 

SCRIP. Usually the term is applied to a 
certificate for a fraction of a share of stock and 
usually, also, scrip is convertible into shares 
when presented in amounts equal to the face 
value of a full share. 

It has no voting power or dividend rights 
until converted into full shares of stock, al- 
though sometimes interest is paid on it. 

Scrip was also the name given to United 
States paper currency of denomination less 
than $1, which is no longer issued; such money 
was commonly called "shin plasters." 

In Great Britain it is the practice to issue 
scrip to represent instalments paid on sub- 
scriptions for stock; when all instalments are 



THE INVESTOR'S PRIMER 119 

paid the scrip is exchanged for stock certifi- 
cates. 

SCRIP DIVIDEND. One payable in scrip, 
or in other words, a due bill, sometimes bear- 
ing interest at the legal rate and usually con- 
vertible into stock, but having no voting power 
and entitled to no dividend until so converted. 

SECOND MORTGAGE. The mortgage 
that is a lien after the first mortgage. 

SECURITIES COMPANY. Same as 
holding company; a company which owns the 
securities of other companies and depends for 
its income upon the interest and dividends 
yielded by these securities. It usually issues 
bonds as well as stock itself. Its bonds are 
collateral trust bonds, being secured by bonds 
or stocks of other companies owned by it. A 
securities company is not necessarily a con- 
trolling company — it is not necessary that it 
should possess a majority of the stocks of the 
companies whose securities are included in its 
assets. 

SELLER'S OPTION. A seller's option is, 
in effect, a put. In stocks sold on seller's op- 
tion the seller may, when the option is for more 



120 THE INVESTOR'S PRIMER 

than three days, put (deliver) the stock on any 
day within the specified time on one day's 
notice to the buyer. In a contract for four or 
more days the buyer, unless the contract is flat 
(without interest), pays to the seller interest 
at the legal rate on the price of the stock up 
to the day of delivery. The amount of a divi- 
dend becoming due during the pendency of a 
contract is payable by the seller to the buyer. 
No contract on seller's (or buyer's) option 
for less than 4 days or which extends beyond 
60 days can be entered into on the New York 
Stock Exchange. 

SELLING SHORT. In Wall Street this 
consists in selling stocks not owned, and bor- 
rowing them for immediate delivery. When 
finally bought in (covered) the borrowed 
stocks are returned. If, in the interval between 
selling and buying, the stocks have declined, 
the trade is profitable; if there has been an 
advance it is unprofitable. See Short. 

SETTLEMENT, The. The fortnightly set- 
tlement on the London Stock Exchange, which 
formerly lasted for three consecutive days, now 
takes four days, as the "carry-over" in mining 
shares begins the day before the ordinary 
"carry-over." According to the London cus- 



THE INVESTOR'S PRIMER 121 

torn, payments and deliveries in stock tran- 
sactions are made only twice a month instead 
of every day as is the case in New York. 

SHORT. One who has sold a stock which 
he does not possess and has borrowed the 
stock for delivery to the buyer, is short of that 
stock. One who is short of several stocks is 
said to be short of the market. One who is 
short is a bear. 

The object of selling short is, of course, to 
repurchase subsequently at a lower figure. 
The rules of the New York Stock Exchange 
enforce the completion of each transaction en- 
tered into "regular way" on the day following 
the transaction. Hence, the speculator who 
has sold short is forced to borrow the stock 
he has sold, but does not own and make actual 
delivery of it next day to the purchaser. This 
he accomplishes through his broker by paying 
the market value of the stock to the one from 
whom he borrowed it and then returning the 
borrowed stock to the lender when he has cov- 
ered, or in other words, bought back the stock. 

When a speculator is short of stock (has 
sold stock which he did not own) on which a 
dividend becomes due, he has to pay the 
amount of the dividend to the person from 



122 THE INVESTOR'S PRIMER 

whom he borrowed the stock, to make delivery 
to the one to whom he sold the stock. 

In speculation in grain, cotton, coffee and 
other commodities, contracts to receive and 
deliver the property are entered into the same 
as in stocks. 

SINKING FUND. A fund to which are 
contributed amounts of money at specified 
times for the redemption of a debt. For in- 
stance, when a sinking fund is established for 
the redemption of an issue of bonds a certain 
amount of money is added to the fund each 
year (or at other stated intervals) until finally 
the fund amounts to enough to redeem (pay 
off) the bonds. 

Sometimes the money paid into a sinking 
fund is invested in other bonds (or other se- 
curities), the interest payments (or dividends) 
received from which help to swell the sinking 
fund. It is not infrequently the case that a 
sinking fund is established to redeem drawn 
bonds. 

SINKING FUND BOND. A bond, pro- 
vision of the payment of the principal of which, 
is made by the creation of a sinking fund. See 
Sinking Fund. 



THE INVESTOR'S PRIMER 123 

SPECIAL AID BOND. One of an issue in 
aid of some enterprise, as a railroad or manu- 
facturing concern, which is expected to benefit 
the nation, state or municipality which issues 
the bonds. 

SPECIAL ASSESSMENT BOND. One 
of an issue of municipal bonds payable, princi- 
pal and interest, from special taxes levied upon 
particular property, for an improvement from 
which this property derives special benefit. 

SPREAD. A spread is like a straddle, a 
double privilege, a put and a call combined. 
If the stock goes below the price named in the 
put end (or part), plus the cost of the spread, 
the holder of the spread profits ; so, also if the 
stock goes above the price named in the call 
end (or part), plus the cost of the call, the 
holder of the call profits. 

Illustration: A spread on 100 shares may be 
bought on which the stock may be called 
(called for) at 102^4, or put (delivered) at 
97y 2 . Say, 2%% ($250) is paid for the spread. 
Then the stock must go above 105 or below 95 
before there is a profit in the spread. 

If a dividend becomes due on a stock during 
the pendency of a spread on it the dividend 
goes to the holder of the spread if he elects to 



124 THE INVESTOR'S PRIMER 

receive and pay for the stock, but it goes to the 
seller of the spread if the stock is put (de- 
livered) to him. A dividend always goes with 
the stock. 

STOCK POWER. The name given to the 
irrevocable power of attorney used in assign- 
ing or transferring title to a certificate of stock. 

STOP ORDER. When an order is given 
to a broker for the purchase of a stock, for in- 
stance, at 100 with instructions to "stop it" at 
98, it means that the stock is to be sold if it 
declines to 98. On the other hand, if a stock 
is sold short at 100 with instructions to "stop 
it" at 102, it is to be bought back if it advances 
to 102. A stop order is employed principally 
to limit loss in speculation ; in such a case it is 
specifically designated as a stop-loss order. 

STRADDLE. A straddle is like a spread, 
a double privilege, a put and a call combined, 
but only one price is named in it. The stock 
may be called (called for) or put (delivered) 
at this price. The stock must go up or down 
more than the amount paid for the straddle be- 
fore there is a profit in it. Illustration : A stock 
is selling at 100 and a straddle on 100 shares is 
bought at this price, for which 5% ($500) is 



THE INVESTOR'S PRIMER 125 

paid. The stock, therefore, must go above 105 
or below 95 before there is a profit to the pur- 
chaser of a straddle. 

If a dividend becomes due on a stock during 
the pendency of a straddle on it, the dividend 
goes to the holder of the straddle if he elects 
to receive and pay for the stock, but it goes to 
the seller of the straddle if the stock is put (de- 
livered) to him. 

SYNDICATE. As a financial term syndi- 
cate means several bankers or capitalists who 
join together to carry out or to insure the 
carrying out of some plan or scheme which in- 
volves a large amount of money. 

The commonest form of syndicate is an 
underwriting syndicate. For instance, the 
capital stock of a company (or a certain 
amount of it) is to be offered for public sub- 
scription at, say, 100 (par). An underwriting 
syndicate is organized and it underwrites the 
entire issue at 90. It, in effect, buys the whole 
issue at 90. The stock taken (subscribed for) 
by the public practically is sold for account of 
the syndicate, for it receives the difference of 
10% between the price at which the stock is 
sold to the public (100) and the price at which 
it is underwritten by the underwriting syndi- 
cate (90). The syndicate is obliged to take 



126 THE INVESTOR'S PRIMER 

the stock not sold to (subscribed for by) the 
public, but it has to pay only 90 for it as 
against 100 which the public has to pay. If 
all the stock is taken by the public (as is often 
the case) the underwriting syndicate has not 
to take and pay for any stock, but simply re- 
ceives and divides among its members (in pro- 
portion to their shares in the syndicate) the 
amount represented by the difference of 10% 
between the price of the stock to the public 
and the price to the underwriting syndicate. 
If some of the stock is not taken by the public 
it may be apportioned among the members of 
the syndicate, but usually it is sold (in the 
open market or otherwise) for the syndicate. 

TIME LOAN. Wall Street designation for 
money borrowed for a specified period, usually 
not less than 30 days nor more than six 
months, the repayment of which is secured by 
the deposit of collateral (stocks and bonds) 
with the lender. 

TON MILE COST. A railroad term, mean- 
ing the average cost per mile of carrying each 
ton of freight. 

TON MILES. A railroad term; the whole 
number of miles the whole number of tons was 



THE INVESTORS PRIMER 127 

hauled. The result attained by adding together 
the number of miles each ton was hauled and 
then dividing by the number of tons shows the 
average number of miles each ton was hauled 
(transported). Ton mileage means the same 
as ton miles. 

TRAIN MILES. A railroad term ; the num- 
ber of miles traversed by a particular trail*; 
or, the number of miles collectively traversed 
by all trains of a railroad. The result attained 
by adding together the number of miles trav- 
ersed by all trains on a railroad and dividing 
by the number of trains shows the average 
number of miles traversed by each train. 
Train mileage means the same as train miles. 

TRANSFER. The act of placing a certifi- 
cate of stock or a registered bond in the nam** 
of a new owner. The new owner of a stock 
which is in receipt of dividends or of a regis- 
tered bond upon which interest is paid, should 
have it transferred into his name before the 
closing of the books for a dividend or for in- 
terest for the check for the dividend, or in- 
terest will be sent to the person in whose name 
the stock or bond stands. 

TRUSTEE STOCK. A stock of the highest 



128 THE INVESTORS PRIMER 

class in which trustees are authorized by law to 
invest. 

TWO DOLLAR BROKER. A member of 
the New York Stock Exchange who executes 
orders for other members for $2 per hundred 
shares, and whose participation in transactions 
ends with the simple act of buying or selling. 

UNASSENTED STOCK OR BONDS. 

Stock or bonds which the owners refuse to 
deposit under an agreement by which their 
status will be changed. For additional infor- 
mation see Readjustment. 

UNDERLYING MORTGAGE. A mort- 
gage anterior and prior in claim to another 
mortgage, as, for instance, when speaking of 
a second mortgage the first mortgage is the 
underlying mortgage. 

UNDERWRITER. One who insures; a 
member of an underwriting syndicate. For ad- 
ditional information see Syndicate. 

UNIFIED BONDS. Another name for con- 
solidated bonds or consols; an issue of bonds 
created to unify or consolidate or refund (take 
up and replace) two or more previous issues. 



THE INVESTOR'S PRIMER 129 

UNLISTED STOCKS. This is the com- 
mon designation for stocks which, in official 
terms, have been "admitted to quotation" in the 
"unlisted department" of the New York Stock 
Exchange. Admitted to quotation means ad- 
mitted to dealings. 

VALUE BILL (of exchange). A draft (bill 
of exchange) drawn against a consignment of 
property. For instance, if A in New York 
ships goods to B in London and draws on B for 
the value of the goods, attaching the bill of 
lading, insurance policy, etc., to the draft (bill 
of exchange), the bill is a value bill. 

Again, if a banker in New York sells securi- 
ties to a banker in London and draws on the 
bank in London for the value of the securities, 
attaching the securities to the draft (bill of 
exchange), the bill is a value bill. 

VOTING TRUST. This is created by 
placing the stock of a company, either all or a 
majority, in a trust, usually for a specified 
period, for voting purposes. Thus, the control 
of the company is locked up in the hands of 
trustees. Receipts for the stock are issued, and 
these may be dealt in and receive dividends the 
same as the stock itself, but they have no 
voting power. 



130 THE INVESTOR'S PRIMER 

VOTING TRUST CERTIFICATE. When 
the stock of a company is lodged in a 
voting trust so that the voting power of 
the stock is confined to the trustees of the 
voting trust (commonly designated voting 
trustees), certificates or receipts for it, called 
voting trust certificates, are issued in place of 
and represent ownership of the stock. The 
certificates are dealt in and transferred the 
same as the stock, and when the voting trust 
terminates or is dissolved the certificates are 
exchanged for the stock itself. 

If dividends are declared on the stock while 
the voting trust is in force, they are paid to the 
holders of the voting trust certificates. The 
certificates, in brief, are in all respects the 
equivalent of the stock, with the exception that 
they do not possess voting power. 

WASHING. A Wall Street colloquialism 
used to describe the operation of simultane- 
ously buying and selling the same stock for the 
purpose of making quotations, and generally 
for the purpose of inducing speculation in the 
stock by imparting apparent activity to it. 
The transaction is fictitious and so is the price. 

WATERED STOCK. A colloquialism used 
when the capital stock of a company is in- 



THE INVESTOR'S PRIMER 131 

creased in amount without a corresponding in- 
crease in assets. When a stock is declared the 
original stock is watered to that extent, unless 
the new stock represents added property or 
value in some form. 

WHEN ISSUED. A term employed when 
dealing in a stock not yet issued. When a 
stock is sold "w. i." it is deliverable when, as 
and if issued. This is a stock future corres- 
ponding to a grain, cotton or coffee future, ex- 
cept that it is indefinite as to time. 

X-D. Ex-dividend, that is, without the divi- 
dend. If a stock upon which a dividend has 
been declared is sold and the sale is not to in- 
clude the amount of the dividend, the stock is 
sold ex-dividend. 

X-I. Ex-interest; that is, without interest, 
or in other words, interest not included. 



PART IL 



Stocks and Bonds 

The corporations, large and small, which in 
the past few years have so extensively suc- 
ceeded individual effort and the old form of 
partnership in conducting the business of the 
world obtain the capital for their foundation 
and development chiefly by the sale of stocks 
and bonds, which are sold largely to persons 
not directly connected with their enterprises. 
By means of these instruments the accumulated 
savings of a vast number of persons are turned 
into a common channel and made to do work 
of which, if not thus united, they would be 
incapable. The issuance of these securities 
makes it possible for the thrifty individual to 
have a share in great undertakings and to profit 
by them if they are successful. The distinc- 
tion between stocks and bonds is clear and 
easily drawn. Bonds represent a lien on prop- 
erty or earnings. They are really certificates of 
indebtedness of the corporation which issues 
them. The bondholder is a creditor of the 
corporation; in other words, he has loaned it 

135 



136 THE INVESTOR'S PRIMER 

money and has taken a certificate of indebted- 
ness which is usually protected by a mortgage 
upon certain property, just as he might have 
loaned money to an individual and taken a 
mortgage on that individual's house, farm or 
chattels. If the interest on the bond is not 
paid, or the principal of the loan is not re- 
turned at the end of the time for which it has 
been loaned, the bondholder may foreclose upon 
the property against which his bond is a lien, 
just as he might foreclose upon a farm or house 
upon which he had a mortgage, the interest 
or principal of which should be defaulted. 
Stocks represent ownership in property or 
business. Every shareholder is a partial owner 
of the property and business of the company 
whose shares he has bought. If the business 
is profitable he receives his share of the profits 
in the shape of dividends, if it is unprofitable 
he will receive no dividends, if it becomes in- 
solvent he cannot foreclose on anything; he 
may share only in whatever proceeds of a 
forced sale may remain after the bondholders 
have received the principal of their bonds. 
Stocks, therefore, are ordinarily less safe as 
investments than bonds. On the other hand, 
stockholders, being owners, may participate 
in the profits of the corporation to an extent 



THE INVESTOR'S PRIMER 137 

limited only by the profitableness of the busi- 
ness, while the bondholder will receive only 
a fixed rate of return upon the money he 
has loaned to the corporation. Stocks appeal 
to the more speculatively inclined investor, 
bonds to the one who wants to keep his princi- 
pal safe and is satisfied with a moderate income 
from it. To show the difference in possibilities 
of bonds and stocks we may instance the case 
of the American Tobacco Company. Its bonds 
paid interest limited to six per cent on one issue 
and four per cent on another. The common 
stock in 19 1 1 paid 40 per cent in dividends. 
That is, the corporation paid to its bondholders, 
or creditors, the interest stipulated in the bond, 
while the owners of the corporation divided 
among themselves profits amounting to 40 
per cent of the total par, or face, value of the 
common stock issue. The bonds sold on the 
market at about the price at which they were 
issued, and the stock at over $500 a share, the 
par value being $100. Against this take the 
bonds and stocks of the Missouri Pacific Rail- 
way System. The consolidated first mortgage 
bonds of this system pay six per cent interest 
and sell at above their face value, while the 
stock pays no dividends at all and in 191 1 sold 
as low as $35 a share. Bonds, it will be seen, 



138 THE INVESTOR'S PRIMER 

are more likely to remain stable in market 
value and to continue to pay the expected re- 
turn, while stocks contain large capabilities of 
profit and loss, both in principal and in return 
thereon. This applies particularly to common 
stocks. 

The preferred stocks of such corporations as 
issue them (preferred in that they must re- 
ceive dividends before the common stock and, 
in case of dissolution of the corporation, must 
receive their share of assets before the common 
stock) have in many instances become so stable, 
through the large earning power of the issuing 
corporations, that they bear a close resem- 
blance to bonds, except that they are not pro- 
tected by a mortgage on property. The rate of 
dividends on preferred stock is generally fixed, 
as is the interest on bonds, and the preferred 
stock does not usually possess voting power, 
which the common does. Common stock more 
nearly represents ownership; its holders con- 
trol the property as long as the bond obligations 
are met; the preferred stockholders ordinarily 
have nothing to say about the management of 
the property, nor does the bondholder, as long 
as his interest is paid and payment of the prin- 
cipal at maturity is not refused. Cumulative 
preferred stock is stock on which dividends, 



THE INVESTOR'S PRIMER 139 

omitted in bad times, must be made up before 
any dividends can be paid on common stock. 
Many corporations, the Pennsylvania and New 
York Central railroads, for instance, issue only 
one kind of stock, which bears no qualifying 
appellation, such as common or preferred. 
" Guaranteed stocks " are generally those of 
a corporation, control of which has been ac- 
quired by another corporation which pledges 
its credit to pay a stipulated dividend upon the 
stock of the first corporation, whether the prop- 
erty of the first corporation continues to earn 
the dividend or not. Guaranteed stocks, pro- 
vided the guarantor is good, rank very high as 
investments, as they have not only the earning 
power of the issuing corporation behind them, 
but also the pledge that a second corporation 
will make up any deficiency if the earnings of 
the first corporation decline. Other varieties 
of stocks are issued in other countries than the 
United States, but those named above are the 
only types ordinarily met with in this country. 
As compared with stocks, the types and 
classes of bonds which are offered to the in- 
vestor are very numerous. People interested in 
securities are constantly making inquiry as 
to the nature of this and that bond, asking 
what is a Convertible bond or a Debenture or 



140 THE INVESTOR'S PRIMER 

a Collateral Trust bond, and as to the elements 
of security they must consider in purchasing 
these investment instruments. A comprehen- 
sive basis for classification and description of 
bonds is generally begun by considering the 
character of the corporations issuing them. 
These corporations may be broadly considered 
under the following heads: Government, Mu- 
nicipal, Railroad, Industrial, Public Service and 
Miscellaneous. Under the first of these general 
heads State, Colonial and Territorial bonds may 
be considered in addition to those of the Fed- 
eral Government; under the second all bonds 
of cities, townships, counties, school districts; 
under the third the great amounts of securities 
emanating from the steam railroads ; the fourth 
including the securities of manufacturing con- 
cerns; and in the general division of Public 
Service corporations are all companies pro- 
viding public utilities — gas, electric, telephone, 
street railway companies. 

A fundamental distinction between Govern- 
ment and Municipal bonds and those of all 
other corporations is in the matter of security. 
Generally speaking, all public obligations are 
without any specific property pledged for their 
safety, while nearly all others stand upon some 
mortgage of property. And further, in case of 



THE INVESTOR'S PRIMER hi 

default on public bonds, there is no redress for 
the aggrieved bondholder, as suit against the 
Government without its consent is constitution- 
ally prohibited. There is, however, the Court 
of Claims, which may be appealed to for relief. 

Government and Municipal securities admit 
of little general classification other than the 
statements above — that they comprise a great, 
indeed the greater part of all unsecured bonds. 
This could be developed further by a considera- 
tion of the purposes of their issue, yet were this 
done but one fact would be prominent — that 
all are issued for some distinctly public service, 
such as the construction of a water works, the 
building of roads, etc. 

It is obvious, therefore, that the numerous 
types of bonds which diversify the investment 
field must be sought in those corporations pro- 
duced and developed by private capital, and of 
a strictly private or quasi-public nature. Be- 
cause of the problematical degree of security 
under any other circumstances, there being no 
pledge of public faith and credit, we have the 
great body of mortgage secured bonds, that is, 
those bonds which nominally have a lien on the 
physical assets of the property in the event of 
default of the payment of interest. Within the 
limits of a chapter such as this it is possible to 



142 THE INVESTOR'S PRIMER 

make barely more than a definition of any par- 
ticular type. To examine into the merits or 
weaknesses of all specific bonds and discuss 
them minutely would involve analysis and 
comparison of much greater breadth. 

By reason of the insistence of many investors 
that their bonds be of First Mortgage it may 
be said that the importance of the word First 
is dependent upon the circumstances. A bond 
may be first in fact, as when it gives an abso- 
lutely prior lien ; it may be so only in a relative 
sense, in that it indicates the order in which 
the bond was put out by the issuing company ; 
or, the use of the term First in the name of a 
bond, undesirable and loose though it be in such 
instances, may be upon the slight ground that 
the mortgage is indeed first on some part of the 
property while on other parts it may have but 
a third or fourth claim. It is therefore obvious 
that the mere presence of this term in a title 
does not necessarily make the bond an abso- 
lutely prior lien. It has been estimated that 
95 per cent in number and 95 per cent in value 
of steam railroad " firsts " are first liens in 
name only. It is perhaps proper to state that 
the efforts toward simplification of the debt of 
many corporations in general and the consolida- 
tion going on is tending toward fewer issues 



THE INVESTOR'S PRIMER 143 

where the terms of a name do not more pre- 
cisely indicate the position of the bond. These 
same conditions are responsible for the pass- 
ing of many junior issues known as Second, 
Third, or Fourth. A few years past a number 
of such issues were upon the market and more 
or less of them were put out, but since that 
time the tendency has been in a different 
direction. That tendency has been to take 
every opportunity to unify a debt. Rather 
than follow an old First mortgage by a smaller 
Second and that by, perhaps, a Third, the prac- 
tice is now to make broad mortgages, and to 
this end there is the General Mortgage, the 
Consolidated Mortgage, and in a few instances 
the Unified Mortgage. The term Blanket is 
more of market nomenclature than otherwise 
and may indicate any comprehensive mort- 
gage. The conditions surrounding each of 
these representatives of a type are infinitely 
varied. As a rule they all take up or refund 
— it might be stated, pay off — underlying 
issues besides performing their function of 
raising new funds. That is to say, on the 
railways whence come practically all of these 
general mortgages a number of smaller issues 
are outstanding, due to the fact that most of our 
great systems are but the joining of a number 



144 THE INVESTOR'S PRIMER 

of small lines. A company needs funds. In- 
stead of issuing a comparatively small mort- 
gage and a little later, under further need, 
another, making them respectively junior, a 
comprehensive mortgage is put upon the prop- 
erty, with provisions in the indenture that when 
the underlying or prior lien bonds fall due 
they may be refunded by bonds of the new and 
larger issue. If the broad mortgage be the 
first that covers the whole property, in time 
it will become a real first mortgage, and then 
enjoy a senior position over all succeeding 
bond issues. In a word, such mortgages gener- 
ally cover the entire properties of a system, 
and their relative position is established by 
the circumstances present. The small railroad 
lines that have been merged into large systems 
have usually had upon each of them at least 
one mortgage. In the financial structure of 
the larger organization such bonds are known 
as Divisional Unless in the taking over of 
the small lines into their respective systems the 
status of these bonds is changed by some arbi- 
trary arrangement, they remain a prior lien 
on their section of the property. 

It will be noted that the above are classified 
with reference to the character of security 
given and priority of the lien. The further 



THE INVESTOR'S PRIMER 145 

fact should be noted that the character of the 
security is a lien on pledged real property. 
There is another type of bonds broadly known 
as the Collateral Trust bond, quite a number 
of which have been issued during the past 
twenty-five years, which are specifically se- 
cured by their lien on other bonds or stocks 
or by both together. The character of the se- 
curity here is a lien on personal property. 
The stocks and bonds to secure such issues 
are usually the capitalization in whole or in 
part of auxiliary or subsidiary companies. The 
degree of safety enjoyed by Collateral Trust 
bonds is a problematical factor, and one that 
can only be determined by going back to an 
analysis of the underlying collateral. 

Bonds of private corporations without any 
tangible security whatever, personal or real, 
are few. The Debenture bond is the repre- 
sentative security of this kind in the market. 
The characteristic of this type being as stated 
(no mortgage security), it follows naturally that 
the corporation which issues them must enjoy 
a large degree of public confidence in its abil- 
ity to meet its obligations and in its integrity 
generally. The most recent example of this 
type of bond is the issue of debentures put out 
by the Michigan Central Railway some few 



146 THE INVESTOR'S PRIMER 

years past. The character of the instrument, 
for it is hardly more than a formal note, — 
a promise to pay, — indicates that only com- 
panies of the standing of that railway com- 
pany can be successful in its flotation. Other 
prominent examples are those of the New 
York, New Haven & Hartford Railroad, New 
York Central, and the Lake Shore Railway. 
Though these bonds lack a lien on specific 
property there is generally a provision where- 
by a trustee is appointed under an indenture 
to certify that there has been no over-issue, 
and to look after the rights of the bondholders 
in case of default. 

Another prominent type that is virtually a 
debenture is the Convertible bond. As the 
term implies, it may be converted (exchanged) 
into something — generally the capital stock 
of the company issuing it. It holds up certain 
speculative possibilities before the purchaser, 
in that the stock which he may obtain may 
appreciate in market quotation to such a de- 
gree that by taking up the stock a substantial 
profit may be realized. The conversion price 
is, of course, definitely fixed and the holder of 
the bonds has what amounts to a call on the 
stock. The issue of such bonds therefore could 
prove profitable to the investor and beneficial 



THE INVESTORS PRIMER 147 

to the company, in that the company obtains 
additional capital and when conversion is ac- 
complished its fixed charges are reduced. 

Income bonds are practically equivalent to 
preferred stock. As a matter of fact they are 
not bonds at all so far as the interest payments 
are concerned. They are contingent in respect 
to their interest return, which may be either 
cumulative or non-cumulative, and are depend- 
ent on the existence of surplus net earnings 
above all fixed charges, on which earnings they 
have a claim preferred ahead of dividends. 
Since the era of reorganization of many rail- 
roads from 1890 to about 1895 few of this type 
of bond have been issued. Then they were 
given as compensation for some sacrifice se- 
curity holders were compelled to make, al- 
though in several instances they were the out- 
growth of poor credit of some Southern and 
Western roads. They generally sell at a low 
quotation, and while the principal is nominally 
protected by a mortgage on the property the 
lien is generally junior to all others at the time 
of the issue. 

A small but interesting type of security very 
generally regarded as an excellent one is the 
Terminal bond. The name implies its nature. 
It is put out in connection with the acquisition, 



148 THE INVESTOR'S PRIMER 

improvement, maintenance, etc., of the station 
facilities of one or more railroads, especially 
in larger cities. It may be the obligation of a 
separate terminal company leasing its facili- 
ties to the entering roads, or may be the joint 
and several obligation of the roads themselves. 
It may represent a mortgage on terminal prop- 
erty used by the railroads and without guar- 
antee; a mortgage on terminal property not 
owned but used by one or more railroads and 
guaranteed by tenants ; a mortgage secured on 
terminals owned by railroad companies and 
either issued directly by the railroads or guar- 
anteed by the railroads; or a mortgage partly 
secured on terminals, issued by the railroads 
and generally covering mileage and other 
property. The relative position of such bonds 
is obvious when it is considered how the value 
of urban real estate is growing by leaps and 
bounds, as for instance the Terminal Associa- 
tion property of St. Louis and that of the 
Central Railroad of New Jersey in Jersey 
City. 

An Equipment bond, as the name implies, 
is one issued to provide funds with which to 
pay for new rolling stock — cars and loco- 
motives. The issues are variously described 
as car trust certificates, equipment bonds or 



THE INVESTOR'S PRIMER 149 

equipment notes. They conform in general to 
one of two standard forms. The " Conditional 
Sale " plan is about as follows : At the request 
of the railroad company and in accordance with 
specifications furnished by it, the trustee, or 
some other intermediary, contracts with the 
builders for the purchase of equipment, ten or 
fifteen per cent of which is paid in cash by the 
railroad and the balance is represented by the 
bonds. They are an obligation of the railroad 
and are secured by a first lien on the entire 
equipment, the title of which remains with the 
trustee for the benefit of the bondholders until 
the last bond has been paid. Upon final pay- 
ment the trustees give title to the railroad. 
The railroad is compelled to keep the equip- 
ment in good order during the life of the 
bonds. The bonds are paid off semi-annually or 
annually, and the last of them fall due about 
ten years from date. Another plan is some- 
times used, and this plan is designated by bond 
houses as the "Philadelphia Plan," whereby 
the equipment is purchased by an individual 
or corporation which leases the equipment to 
the railroad at a rental equivalent to the in- 
terest and deferred payments of the bonds. 
The lease is assigned to a trust company as 
trustee which issues its certificates, which are 



150 THE INVESTOR'S PRIMER 

guaranteed by the railroad. The lease runs 
until the last bond is paid, when the title passes 
to the railroad. 

We have thus far considered distinctive types 
and have about covered the field from that 
point of view. There may be a sub-classifica- 
tion applied to many of these, according to the 
terms of payment and retirement of issues, 
according to the purpose of issue, the character 
of the payer, etc. Bonds with a Sinking Fund 
provision are those for the security and pay- 
ment of which a fund is created by contract 
which cumulates under the protection of the 
trustee. Numerous variations of sinking funds 
are found according to the class of corporation 
establishing same, and according to many other 
circumstances. By some the fund retires the 
bonds periodically; with others it is invested 
to yield sufficient to pay off the debt at ma- 
turity. Securities with a sinking fund pro- 
vision that pays off some part or all of the issue 
before the maturity date are known as being 
redeemable. A few irredeemable bonds are in 
existence, but so few as to be negligible if we 
accept the bonds of some governments, such 
as British Consols, French Rentes, and a few 
others which are perpetual in that they are 
never paid off. 



THE INVESTOR'S PRIMER 15 1 

The term Joint applied to a bond indicates a 
liability of two or more companies. A (guar- 
anteed issue may be so secured as to princi- 
pal or interest or both principal and interest. 
Many such bonds are the underlying issues of 
a subsidiary company guaranteed by a larger 
or parent system. The guarantee is written 
and attached to the instrument itself, or evi- 
denced by a separate writing. Endorsed bonds 
are similar, the contract of security being the 
written name of the guarantor upon the back 
of the instrument. The designations of Im- 
provement or Extension or Construction or 
Refunding are clearly indicative of the particu- 
lar functions of the respective issues, while 
Participating and Profit Sharing features are 
but attractive innovations going along with 
a very few issues whereby holders thereof 
enjoy certain benefits under special circum- 
stances. As for instance if the bonds were of 
a Collateral Trust issue any extra dividends 
on the underlying stocks might be distributed 
among the holders. 

Stocks are put in the hands of the public 
mainly through the numerous stock exchanges, 
where they are " listed " and may be bought 
and sold like merchandise at a fair, the only 
mystery about the process being the methods 



152 THE INVESTOR'S PRIMER 

by which the public is induced to take interest 
in a new stock, which are described in another 
book of the Investor's Library, " Stock Prices," 
and in any event pertain more to a Specula- 
tor's than an Investor's Primer. The distribu- 
tion of bonds, however, is well-nigh an exact 
science and deserves to be treated in this vol- 
ume in some detail. 

Investors may get their bonds in two gen- 
eral ways: by buying on the Exchange or 
directly from the banking houses, although an 
amount twenty-five times greater in the aggre- 
gate is sold in the latter way. The larger and 
stronger of these private banking houses, asso- 
ciated with several of the largest national banks, 
form one class of dealers who may be consid- 
ered as wholesalers, buying and selling annually 
anywhere from $100,000,000 to $300,000,000 
each. They are the class of great underwriters. 
These underwriters act as the fiscal agents of 
large groups of railway corporations, and when 
any company of the group has an issue of 
securities to be put upon the market, the bank- 
ing house generally has the transaction com- 
pletely in its charge. Railroad issues consti- 
tute the greater part of the underwriting by 
these houses. But they often bid for entire 
issues of municipal bonds, the bonds of a state 



THE INVESTOR'S PRIMER 153 

or even large blocks of Government securities, 
although the nature of bids for these public 
bonds is different from their transactions with 
the railways. They enjoy peculiarly close re- 
lations with these latter corporations, while in 
the case of public bonds numerous bids by 
others are usually made. The business of these 
houses is so thoroughly established, they can 
command so much capital, borrow so heavily, 
and make such substantial profits that they do 
not hesitate to purchase blocks of bonds of 
great amounts. 

The retail dealers are more numerous. Some 
of these are banking houses of importance and 
strength and selling from $50,000,000 to $150,- 
000,000 worth of bonds in a year. Some of 
them deal exclusively in municipal bonds, 
others in steam railroad securities, and again 
others in electric railway or industrial issues. 
It is through these firms largely that the 
great investing public of the country is 
reached. Their organization is highly devel- 
oped. One of the most valued assets of a 
house is the list of customers' names. A 
million dollars would not purchase the lists 
of some houses. In evidence of this fact an 
offer of $25,000 was made not long ago by a 
house for the return of a duplicate copy of 



154 THE INVESTORS PRIMER 

its list, which had been misappropriated by a 
former salesman. 

There are in this country several hundred 
thousand people of independent fortunes; and 
it is these that the retail bond dealers seek 
to reach. Not only do these houses adver- 
tise extensively and have voluminous corre- 
spondence, but many of them have a force 
of salesmen traveling over the country. The 
selling of bonds has become much like the 
selling of other wares, groceries, books, etc. 
Within the house elaborate systems are de- 
veloped. Information of many securities is 
catalogued and indexed, and systems of vari- 
ous kinds are used for following investors 
and facilitating the work. It is the aim to 
have complete knowledge of securities for 
convenient reference. Because of the high 
reputation that these bond houses have es- 
tablished they enjoy the absolute confidence 
of hundreds of investors, many of whom have 
not the time nor facilities to study the in- 
vestment value of a security; and indeed if 
they had, could not arrive at any sound con- 
clusion because of a limited understanding of 
the subject. The fact is that fully seventy- 
five per cent of the customers of these bond 
houses purchase securities largely on the rec- 



THE INVESTOR'S PRIMER 155 

ommendation of the house, because of its 
character. The organization of all bond 
houses is similar. In a general way it com- 
prises three departments, each with its spe- 
cific function, which may be understood from 
its name. These three are known as the Buy- 
ing, Selling and Financial Departments. To 
the first is delegated the duties of analysis 
of securities offered the house. Critical points 
must be investigated, whether railway, indus- 
trial or municipal bonds are in question. 
Upon the Selling Department, obviously, de- 
volves the responsibility of marketing the 
issue. It must know almost immediately 
about when or where the securities may be 
disposed of. The training of the managers 
of these departments enables them to form 
quick judgments on these points. It is in 
this department that the selling literature 
so broadly advertised and distributed is pre- 
pared. The third and financial department 
assumes all duties not specially delegated 
elsewhere. Its operations are broad in scope 
and involve the relations of the house with 
its lenders, who are the banks, and also some 
private individuals. Large amounts of capi- 
tal are necessary, and besides, other consid- 
erable amounts of money are borrowed. 



156 THE INVESTOR'S PRIMER 

When the credit of the house is of a high 
type it is comparatively easy to procure vast 
amounts of money by giving as collateral 
for same the bonds purchased. The bonds, 
of course, drawing interest practically always, 
return more than the cost of the borrowed 
money in the market; and from this source 
alone arises substantial profits when opera- 
tions are conducted judiciously. The nature 
of its collateral enables a bond house to bor- 
row money to greater advantage than under 
other circumstances. Numbers of these bond 
houses, in addition to establishing intimate 
connections with financial institutions at 
home, develop relations with foreign markets 
through some foreign bank. In this way they 
are enabled to borrow to advantage in a for- 
eign market if money rates at that point are 
lower than at home. In addition to these purely 
financial functions of this department, it has 
the administration of the house in its charge. 
There is, of course, the greatest possible co- 
operation between all departments. An issue 
of bonds is not bought until the Selling and 
Financial Departments have passed judgment 
as to their ability to sell and to borrow upon. 
That a bond that is bought with discrimina- 
tion and at a good price is practically sold is 
the judgment of many houses. 



THE INVESTOR'S PRIMER 157 

The distribution of securities, whether by 
large wholesalers or those retailers almost as 
strong, is often accomplished through syndi- 
cate operations. It will be noticed that in the 
case of many large issues that are advertised, 
several firms, even of the strongest type, are 
indicated as offering the bonds. Any one of 
these houses could, if it chose, care for the 
whole amount, yet it is associated with two 
or more others. Together they have under- 
written the issue as a syndicate of bankers. 
There is a joint participation in producing 
the capital represented by the new issue and 
joint action in distributing the new securities 
in the market. Many variations of the prac- 
tice of underwriting are found. A large and 
strong banking house may take from a rail- 
road for its own account the entire issue, and 
so far as the corporation is concerned it has 
only to look to the house for its funds. Yet 
the house may not wish to distribute so large 
a block of the specific securities among its 
own clientele and will thus associate other 
houses in the operation. The governing mo- 
tive, however, in syndicate operations is the 
minimizing of risk — not from any fear as to 
the soundness of the securities, but from the 
possibility of not being able to dispose of the 
bonds as readily as anticipated. 



158 THE INVESTOR'S PRIMER 

Financial underwriting is a type of insur- 
ance which involves risk. The insurance com- 
panies assume risks of fire, death, etc., while 
the banker or group of bankers who under- 
write an issue of bonds accept the risk of a 
favorable market. In the case of some large 
issues of bonds the original bankers or mem- 
bers of the syndicate are known publicly, for 
the newspaper advertisement setting forth par- 
ticulars of the issue is generally signed jointly 
by the banking firms. It is very often the 
custom for each of the participating bankers 
to form a second syndicate to further mini- 
mize the risk, which is in effect a distribution 
so far as they are concerned. Individuals of 
wealth and those who command capital, trust 
companies, banks and smaller bond dealers 
may be the members of this sub-syndicate as 
we may call it; and upon them in turn is the 
task of the real distribution among final in- 
vestors who take the bonds, locking them up 
for the interest return until maturity date. As 
we have stated, there is no stereotyped method 
as to the formation, conduct and personnel of 
these syndicates. In the case of several large 
houses underwriting an issue, it amounts to 
little else than a division of the issue among 
them, while a sub-syndicate, in the sense here 



THE INVESTOR'S PRIMER 159 

given that term, is generally conducted in 
about the following manner: The firm seek- 
ing to form the syndicate approaches such 
institutions and individuals as are closely as- 
sociated with it. If the project is likely to 
yield considerable profit the group would not 
be made too broad. A very limited circle of 
participants might be able to conduct opera- 
tions without any formal document of agree- 
ment in respect to the terms and conditions 
under which the issue was to be disposed of, 
but it is the prevailing custom to have a writ- 
ten record of the conditions and terms, this 
record being known as the syndicate agree- 
ment. In this agreement are provided for such 
matters as the price at which members shall 
receive their bonds, the details of manage- 
ment, the question of the length of time the 
syndicate shall remain open, and other similar 
matters. A member of the syndicate may en- 
deavor to dispose of his allotment or have the 
allotment withdrawn from sale for a specified 
time, or until the syndicate is closed, in which 
event the price to this subscriber would be 
slightly under that made to others of the syn- 
dicate. After the stipulated time had expired, 
his bonds could then be put upon the market; 
but their absence from the market while other 



160 THE INVESTOR'S PRIMER 

members were selling, enhancing in a meas- 
ure the ability of the others to distribute 
their holdings, is the reason for the conces- 
sion in price to the member withdrawing his 
allotment. 

The management of the syndicate is gener- 
ally the work of the bankers. All books of 
record are kept by the house and the details 
of distribution are managed by it. Although 
the bankers use their every facility to dispose 
of the securities, it is expected that members 
of the syndicate shall also labor to this end. 
The conclusion of operations may come 
shortly after the issue is put upon the mar- 
ket, if the market absorbs it readily, or some 
bonds may remain unsold for years. When 
the syndicate is closed any unsold portion is 
prorated among the members, which they must 
take according to the terms of the agreement. 
This is a description of the process in simple 
form. It is equivalent to an agreement with 
the promissors upon certain bonds, or the 
management of a company, through the 
bankers, to take at a previously fixed value 
all securities of a given issue to which the 
public generally or investors at large may not 
care to subscribe. 

The profits of syndicates are varied, depend- 



THE INVESTOR'S PRIMER 161 

ing upon many factors. In the first place the 
chance of a substantial profit is the moving 
consideration in modern financial underwrit- 
ing. The size of the issue, the type of the 
bonds, the time of the market, with other 
conditions, influence the profits. For the as- 
sumption of risks and the exertion of their 
influence the bankers demand and receive a 
substantial reward. It has come to be recog- 
nized that commissions must be paid to 
bankers. In consideration of this the bankers 
loan their credit and reputation by placing the 
bonds directly or indirectly with the public. 
The price at which a corporation sells its 
bonds to bankers is, of course, a matter be- 
tween the house and the company. They may 
get a five-point profit, although on high grade 
securities this is not usual. If the banker 
makes two points, and the syndicate as much, 
it would be considered good. A strong com- 
pany and a strong banking house means fair 
commissions; a weak company with the same 
house would produce more profit. 

One variation of underwriting is to under- 
take the disposition of a block of bonds with- 
out actually purchasing them, and to pay over 
to the company the proceeds of only those that 
are sold. The purchase price, of course, is 



162 THE INVESTOR'S PRIMER 

stipulated, and the bond house may obtain 
profits varying with the success of the sales- 
men or the locality where sold. 

From the facts stated it may be readily 
appreciated that the reputation of a banking 
house is to be most jealously guarded as the 
foundation for a long and successful existence. 
Many of the large and strong houses make it 
a boast that no investor has lost money or 
been led into poorly judged investments on 
their recommendation. And a further boast 
with some is that no issue ever sold through 
them has defaulted on a single coupon. Under 
such conditions it does not excite wonder that 
such great amounts of securities are floated 
with such comparative ease. The facilities 
which corporations enjoy in raising new capi- 
tal and the sense of security that the investor 
has by relying upon these strong banking in- 
stitutions are full justification for their profits. 



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J 



We Investors' Catechism 



By MARC M. REYNOLDS 



How Are Stocks Manipulated? What Is a 
Bucket Shop? How Stocks Are Bought on Mar- 
gin. Meaning of Puts, Calls and Privileges. 
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endorse a Stock Certificate. What Are Bank 
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b Cycles gf Speculation 



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The Art of Wall Street Investing 

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The Investors' Primer 



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We Cycles gf Speculation 

By THOMAS GIBSON 

This book was written with the intention of en- 
tering a little further into the great questions of 
speculation and investment than "The Pitfalls of 
Speculation," by the same author. Among the 
subjects treated in the various chapters may be 
mentioned the Effect of the Gold Supply on Prices 
of Securities and Commodities; the Effect of Such 
Factors as Politics, Crops, etc.; Puts and Calls, 
the Question of Dividends, Effects of Business 
Depression, Best Methods of Trading, etc. 

Bound in Blue Cloth, with Gilt Title . $1.50 



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Smith's 
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(Second Edition) 

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